A remark was posted awhile back on our website that I want to comment on. They posted:
Is it ok for a contractor to charge for durables?
I mean I paid a huge markup and administrative fees, but digging deep into the charges, we paid for 3-5 power tool batteries, an orbital sander, miter saw, saw horses, air hoses, utility pouches, measuring tape, step stool….you name it!
Of course, there’s a slew of other irregularities (like other client names on time sheets). I super-ready to lawyer up!
It’s obvious to me that the building owner hired what I’d consider a “C” or “D” list contractor. I categorized contractors in this article; hopefully since you’re reading this you identify as an A or B lister, or realize that’s where you need to be. I’m willing to bet this owner’s top criteria for selecting their contractor was lowest price.
While the listed purchases are customary at some point for most contractors, I can’t defend this invoice. What in the world was this contractor thinking when he gave the owner this information? How did the owner acquire the time sheets for this job? Is it any wonder the owner and the contractor are having a problem?
I don’t know how large the job was, but it’s obvious that the contractor believes in transparency and full disclosure. I assume it was a cost-plus contract. For those who believe in or participate in this game, this note is proof of what can happen when contractors get involved with home or building owners who demand that information. The contractor handed the owner a handful of bullets to shoot back at them.
The owner wrote, “I paid a huge markup and administrative fees.” Huge by what standard? What is he comparing it to? How do they know what the contractor’s markup should be? I’ll wager the contractor also does not know what his markup should be for his company.
The end of the note, “I super-ready to lawyer up!” This is the result you can expect on a job at some point in time when you work with transparency or full disclosure.
Clients don’t need to see the details of your purchases. You don’t need to account for every board and nail. They don’t need to review your timesheets, and if you purchased equipment for a job, they don’t need to see those details either.
Here’s what happens next. The owner, thinking they have a case, will get an attorney involved. Now both the owner and the contractor will spend money trying to prove they’re right. They both took the wrong approach to getting the job built and as a result the price for the job will escalate for both parties. The contractor has zero chance of making any profit on the job; instead, they’re going to waste money on attorney’s fees, lose potential referrals, and deal with delays on other jobs.
Someday, maybe, owners will stop buying remodeling work or new home construction based on low price, and will stop trying to control the contractor’s price by insisting on cost-plus contracts.
Someday, maybe, more contractors will learn how to run a successful contracting business. They’ll learn the advantages of fixed figure contracts and avoid cost plus contracts.
You can build a successful business if you do it right. If you don’t, your clients will write notes like the one above. Read this article about the risks of cost plus contracts, then learn how to estimate your work and quote a firm-fixed figure price, with written contract, for every job. Work to become an “A” list contractor and you’ll make a reasonable profit without having knots in your stomach because your clients are unhappy.
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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