A reader sent us a question —
We recently took on an insurance job for a good repeat customer. His water heater leaked in the attic while out of town and caused much damage in his home. After providing him a thorough proposal and beginning the work, the insurance company began the process of telling him we were overcharging and that our markup should only be 15%. We are currently in the process of explaining that the insurance company is not a construction company and does not know what it takes to make a living in this industry. Normally we provide a thorough proposal with a bottom line price for a job and the client either accepts or declines. In certain rare situations, we are forced to expose (and usually defend) our markup. We run a good honest business and do not overcharge. I would like to know if you have any tips for explaining markup to customers when the situation arises. Sure hope more remodeling contractors in my town straighten out their markup!
Insurance adjusters are just parroting the party line. Each insurance carrier puts out an “edict” that states that the acceptable overhead and profit margin for any contractor should be XX% overhead and YY% profit. Many of them say 10% overhead and 10% profit. They expect their adjusters, by whatever means, to get contractors (and by default owners) to abide by these X and Y standards for overhead and profit.
The truth is, no contractor can survive on 10% overhead and 10% profit. The contractor’s insurance expenses alone are usually more than 10%, and that’s a small part of their overhead needs! What happens is that many contractors doing insurance work define job costs differently – many of the expenses that are probably included in your markup (i.e., overhead) are incorporated into job costs, allowing for a lower markup than usual. The price is the same – the factors used to reach that price (job costs and markup) have changed. It’s a game.
That said, insurance companies do recognize different gross profit percentages for contractors. I have heard of adjusters offering 10% overhead and 10% profit to one contractor and then approving another job with another contractor with a much higher overhead and profit. That said, you have to deal with this subject with the homeowner. When I was doing insurance work, and when the subject came up, I would say something like this:
“John/Mary, as you know, any company that does construction work has the cost of building the job. In addition to that, there are also additional expenses that are accrued for overhead. Overhead is all the things you don’t see on your job. Payroll preparation, fuel for our vehicles, insurance for your job and our office and our employees. Our office employees must be paid, and city, county and state fees and licenses add up in a hurry. There are a ton of these expenses and they all must be paid.
A good example of this is that city, county or state fees can easily amount to 6 to 8% of the total cost of your job. Now, add to that our rent/mortgage for our office and store room, our insurances, our utilities, our office staff wages, my salary, phones, our CPA and legal fees, our office supplies and you can easily see that 10% for overhead won’t begin to cover our expenses. 10% is fair for profit; we can live with that although it is well below many other types of businesses, especially the insurance company that is insuring your home/building.
Now, there are different ways of determining job costs, and not everyone calculates it the same. Overhead items are sometimes included in job costs, allowing for a lower markup. You know that having the lowest price for a job isn’t a good idea, and you called me to do this work because you know I’ll do the job right. That’s what is important.
John/Mary, we do a good job of estimating the cost of repairing your home, we charge our overhead at the amount it costs us to do business and we ask for a fair 10% profit. We do a good job for our customers, we charge a fair price and we have to make a profit. I believe that is fair, don’t you?”
Take this example, modify it to suit your personality and move forward.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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