When Should You Cut Your Markup?

As the economy slowly improves, we are being asked to revisit issues we haven’t discussed for many years. And we’re grateful these topics are coming up, it’s another sign that things are getting better.

A note we received:

My partner and I are learning a lot from your book “Markup and Profit“, and from the online class. We are now on our second go-through, and are hearing things we missed the first time through. So much information there!

We are working on an estimate for a “Luxury” kitchen renovation, and this is a first for us. Most of our kitchen renovations run in the $25k – $40k range.

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The costs alone on this one will be around $90k (highly customized cabinets, Wolf/SubZero appliances, Quartz or Marble countertops, etc.)

We know our markup… it’s 50% this year, because we’ve been giving it away! Our question, and you probably see it coming: Are we really justified to add a 50% markup to these “Luxury” items and subs? Our work and involvement will probably be LESS because we are working with highly skilled, satisfaction-oriented subs and suppliers this time. In fact, it would probably take MORE of our time and involvement if we were merely working with “standard” cabinet makers, appliances, and countertops.

So we are struggling with doing what’s right, for our company AND for our customer. Do we use a 50% markup even though the “luxury” material / subs will probably make our job easier?

Is there ever a time when it makes good business sense to reduce the markup? Or are we still trying to “give it away?”

In my opinion, you shouldn’t cut your markup on anything. But there other ways to handle this without cutting your markup.

Have the customer purchase the some of these big ticket items direct. I normally tell our readers to never let a customer supply anything, but there are exceptions. With a properly worded contract, you have zero liability for the product or equipment.

That’s the risk that owners, who are focused on price, don’t see. Stuff happens. Things go boom, they break, they stop working. If you supply it, you’re responsible for it. That’s why you need the markup. If they supply it, they’re responsible for it.

So you can reduce the price by having the owner purchase the item and have it delivered. You need to add language to your contract that specifies a couple of things.

1. The owner must be present when the item is unpackaged before installation. That way you can’t be blamed for any scratches, nicks, dents, broken or missing stuff, etc. They see it as it’s unpackaged, so they know exactly how it was received.

2. Be clear about what you are and aren’t liable for. You’re responsible for the installation, and if anything goes wrong during the installation, it’s on you. They are responsible for the product itself – if, after installing the dishwasher, you find out the dishwasher is defective, they’re responsible for any labor to remove the dishwasher, get a new one, and install the new one. You might want to do the installation on a time and material basis, or maybe as an installed allowance amount.

One example of why this is important is the exhaust hoods that are often installed in high end kitchens. Some of those units have exterior air handlers and they can take up to two days all by themselves to get installed, not to mention the specialized wiring, air ducts, concrete piers, etc they set on. So be careful when you talk about how much time you’re including in your contracts for owners supplied materials.

That is one way to handle the high-end materials on a project like this, but I don’t suggest doing the same with subcontractors. You need to apply your markup to the subs, and I’d suggest the full markup. Even if they are highly skilled, satisfaction-oriented subs, you are responsible for them. Remember, if anything goes wrong during the installation, it’s on you. If it’s the subs fault, it’s on them, but it’s your job to work that out. That’s why you apply a markup to their services.

But in direct response to the question, “Are we really justified to add a 50% markup to these ‘Luxury’ items and subs?”, I have to ask my own question. Is the client justified in asking you to fix something that’s gone wrong in a year, two years, three years from now? Yes, they’re justified in asking you to guarantee what you build. So, yes, you’re justified in charging them over and above cost for things you have to guarantee. If one of those subs is out of business or no longer walks the earth, who will pay for the repair or worse, replacement then? You will.

One of my favorite sayings is, “Don’t markup anything you can afford to pay for twice out of your own pocket.”

Now, I know some of you will agree and some will disagree. I want to hear your opinion, let me have it!

“Don’t ever know who you may meet, or just because a person may not be dressed up all fancy, don’t mean they’re not an important person. You just don’t ever know who you’re gonna meet in life. So that’s why I look at everybody as equal. Can’t just judge. I treat everybody with respect. Every man.” — Floyd Mayweather, Jr.