A friend called recently about an interesting experience he had the day before. An architect he knew asked him to meet with the owners of a proposed new home. My friend had known the architect for some time and agreed to the meeting.
The plans for the job had been drawn but were by no means complete. As they were discussing the project, the architect asked our friend, in front of the owners, “What’s your overhead and profit percentage?”
My friend told me that in his experience, it’s common for architects to ask that question on high-end projects. Other contractors tell me the same thing. They’ve come to expect to be asked to share their overhead and profit figures when dealing with architects on high-end remodeling or custom homes.
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In my mind, that’s a remarkably impertinent question, especially in front of clients. It isn’t the kind of question you ask a fellow professional, it’s the kind of question you ask the hired help. It shows an appalling lack of respect for the contractor as a business owner.
If you’re an architect, please don’t ask personal questions of another business owner, especially in front of a potential client. Not only is it inappropriate, it gives the client the impression that the major driving force on the price of their project will be the contractor’s overhead and profit margins. Clients need to understand that the two major factors that will determine their cost on their project are the design of the project and the selections the owner makes. You need to help them understand that rather than pushing the cost issue onto the contractor.
When you ask a contractor to disclose their financial information, you put the contractor in a tough spot because many owners believe that the 10% overhead and 10% profit nonsense used by insurance companies is the right pricing for a project. If you understand the finances of a construction company, you know that a contractor can’t operate and make a profit using those numbers.
When a contractor does tell you their proprietary information, what do you plan to do with it? Do you plan to use it to give you an edge in negotiating the final price of the job? Are you using the contractor to show the owner that you’re an authority on how to get the lowest price on a job?
If you subscribe to the theory that a contractor shouldn’t be allowed to do much more than cover their costs when building a job, I wish you well. I wouldn’t want to do business with you, but I’m sure there are contractors who would be willing to work with you until they are either too tired or too deep in debt to continue.
If you’re a contractor and you’re asked that question, how should you respond? If you’re willing to throw the job away, one response would be, “That’s none of your business.” A more appropriate and polite response would be, “That’s proprietary information.”
You can also take steps to prevent that question. When you get a call from an architect, be sure to say when you set the appointment, “I don’t discuss my proprietary information in front of the owner for any reason. If you need to know my numbers, and can prove that need to me, we can talk about it in private as long as it stays private. Is that fair enough?”
Now the architect can make sure that they steer clear of putting the contractor in a position of having to fend off questions from clients. If the subject comes up, the architect should step up and tell the client that they’ll discuss those issues later with the contractor. The discussion should stay focused on what the client wants, making sure they understand that their design and their selections will have more impact on the final price than the contractor’s overhead and profit.
I imagine that most architects would not be willing to disclose how much of their fee is take-home pay and how much covers their overhead and profit. They also wouldn’t want to make it a topic of discussion in front of clients so that others can discuss whether their overhead expenses are too high or if they are trying to make too much profit.
It’s a question of respect. Architects and contractors are business owners. They both deserve to be treated as professionals, with a focus on the work they will be doing. Working together, they can provide a quality project for the client at a fair price. Let’s make that the goal.
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.