Justifying Your Price

If and when you have to hire a lawyer, it’s important to find one who specializes in construction law. It also helps to have one who is on your side and is willing to fight for what’s right.

A contractor sent me a note last fall and I’ll share parts of it here:

I am a general contractor and I accepted work on a commercial remodeling project before there were drawings or an architect. Therefore my contract did not have a set amount for the project. It only had an arrangement that I submit work orders with a description of the work (as we go and as the drawings become available) and an amount for the cost, and they approve or disapprove.

Now they are accusing me of overcharging them and they want records of all material and labor cost and they want to pay a percentage they see fair for them.

My lawyer is asking me about the industry standard for markup on commercial remodeling projects so she can negotiate a payment and justify my charges. Also she wants to know how much money I made out of the project so she can justify my charges.

My question to you, is there an industry standard for marking up the labor and material on commercial remodeling projects? . . . I feel that my lawyer is going about it the wrong way. One lawyer charges $150 per hour another lawyer charges $400 an hour. Where is the industry standard?

Time is of essence here and if my lawyer wastes time negotiating with them I might lose the window of putting a lien on the property if they choose not to pay.

I also offered them to find another cheaper contractor to finish the work every time they complained about the charges, and they did not want to do that.

So is there an industry standard? And can they deny me payment because they perceive my charges to be higher than what they researched and found online? That’s their reference for what my charges should be.

There is no industry standard for overhead and profit margins. I’ve talked about that many times, and it doesn’t matter whether we’re discussing residential, commercial or industrial work. There is no industry standard.

If your lawyer believes you have to justify your pricing, you’ve lost the battle. I appreciated the comment about lawyers’ fees: if they don’t have an industry standard, why do they think that contractors do? I wonder if this lawyer would be willing to disclose how much money she’s making on this negotiation to make sure her charges can be justified? It’s time to find another lawyer and file that lien.

Your overhead expenses (such as job supervision, office staff, fuel, office supplies and insurance) determine your markup. Now, you can certainly play games with your numbers by moving overhead expenses into job costs and applying a lower markup, but the final price is usually the same. Your price is what you need to cover your job costs and all your overhead expenses, and make a reasonable profit. Your price isn’t calculated by some factor found on the internet. It’s calculated by looking at your cost of doing business.

This is a perfect example of why cost-plus jobs are dangerous. All it takes is a job like this to cause you serious financial harm or even bankruptcy.

The job was done on a cost-plus basis because the drawings weren’t yet complete. Without drawings, the owner has no idea what the project will cost. I’ll wager that the reason the contractor’s pricing is being disputed, especially at this point in the game, is because the job went way over budget. They want someone else to take the loss, and the contractor is the best target. Don’t walk into a setup like this.

This is why we advise always working with a written contract and a firm, fixed-price quotation. And never stop marketing your business so you won’t feel the need to take this type of job. You need a quality website that’s optimized to generate leads; some of our contractors are getting a good share of their business off their website. It’s less expensive than other forms of advertising, and if it’s done well, it makes the final sale easier.