Why Contractors Charge So Much

Some homeowners may be asking themselves why contractors charge so much?  Or maybe don't have an idea and are looking for a clue.  Their cost can be broken down into 3 categories: Overhead, Labor, and Materials.  We hope the following information helps elaborate on why they charge what they do and ways to save money.

Overhead

Labor

Materials

Profit

Dollar Bill in Jar

Overhead

We'll start off with a big one first.  Overhead is responsible for a good portion of a contractor's cost and generally refers to the costs associated with owning a business and having employees.  Some of those costs would look like this:

  • shop & storage

  • rent/mortgage

  • equipment

  • marketing

  • office staff

  • materials

  • insurance

  • maintenance & repairs

  • workers compensation

  • payroll taxes

  • and other recurring expenses

To figure one's overhead, you would add up all the fixed expenses​(highlighted orange) per month to figure their monthly overhead cost.  Maintenance and repairs are usually figured off of previous years' data as well as taking into consideration any additions like equipment or tools.

Accountant
 

Labor

 
Painter at Work

Labor is probably the largest part of the expense for most projects.  After all, you are essentially paying for someone's time, experience, and hard work.  What price per hour would you put on the time you can't get back?  

Along with labor rates come payroll taxes:

  • federal

  • state

  • local

A good rule of thumb is to add at least 20%-30% to the labor rate for taxes mentioned above as well as workers compensation and any other insurances required for specific professions. 

For example.  

       Supervisor-$25 per hour plus $7.5(30%)= $32.50 per hour

       Laborer- $15 per hour plus $4.5(30%) = 19.50 per hour

and that's not including mark up for overhead or profit margin.  

       

Materials

 

Material Cost is the other factor in the contractor's pricing system.  Materials are generally categorized as good, better, and best.  Which it's no secret that the price goes up as the quality does.  This is why knowing your budget is very important and telling your contractor.  If your shopping for a sedan, contractors don't want to and shouldn't waste theirs and your time trying to sell you a sports car.

Often times and it shouldn't be a secret at this point in the age of information; materials provided from the contractor are usually marked up as a means to recover overhead & profit.  This could also be an opportunity for homeowners to save money by buying the material, picking up or facilitating delivery, eliminating mark-up on materials.  

Benefits of contractors picking up materials:

  • A better eye for imperfections, bad materials

  • Better pricing on materials

  • Less stress 

  • proper vehicles for transporting materials

Profit

 
Upward Curve

Profit in one way or another is the ultimate reason for the contractor to be at your property.  After all, they do need to earn some money to live a comfortable life.  What is a fair profit margin?  What would you want as a profit margin, if it was your business?  

  • 5%

  • 10%

  • 15%

  • 20%  

To give you some examples of profit margins from companies you might be familiar with:

  • Walmart- 24% (2020)

  • McDonald's- 46% (2015 to 2019 average)

  • Home Depot- 34% (2020)

  • General Motors- 17% (2020)

  • Tapestry- 69% (2020) owns Coach, Kate Spade, and Stuart Weitzman

After seeing these companies' profit margins, what would you ask for?  Keep this in mind when you are trying to deal with contractors.  Oftentimes these are small business owners trying to make a comfortable living like you.  Most want to do honest work and deliver value to their customers at a reasonable price. 

BUT..... when homeowners compare their pricing with businesses that may not be doing all the things they are supposed to be doing:

  • payroll taxes

  • insurances

  • etc.

They undermine the others in their profession while being able to charge less.  In some cases operate in a deceiving manner- 

  • cheating customers out of money- they don't establish themselves online which helps hold them accountable- bad reviews

  • poor performance or workmanship- they don't laws and required business practices, they may not follow proper installation methods too

We also understand there are quality contractors that operate in this manner and deliver top-quality service.  The homeowner can get a deal saving money, which is fine when you NEED to save the money.  Otherwise, try to support other honest contractors as best as you can.  Most are trying their hardest to deliver quality work and stay on top of the rules and regulations.

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