Contractor Markups on a Home Addition

Answered by Jeffrey ~ May 28, 2010 ~ Comments

I'm suffering from sticker shock on the bids for a kitchen remodel and a new small bedroom addition. Two contractors have bidded with more than a 20 percent markup on materials. Is this a reasonable markup on a home addition or should I keep getting estimates?

Paul Y. ~ Oklahoma City, Oklahoma

Jeffrey Anderson

Hi Paul, I think you should get one or two more contractor estimates regardless of the material markups of the first two, unless you had already narrowed it down to these two for some reason. I always advise customers to get at least 3 bids on a project.

If the economy was good, I wouldn't think the 20 percent markup on the materials was too far out of line. A little maybe, but not too much. A lot has to do with how a contractor figures their job costs. These contractors may figure their overhead costs into job costs such as the materials, so the materials end up with a 20 percent markup. When I figure an estimate I know that a lot of the work will be done by the company's employees, so I figure overhead costs into their labor. They may be paid $20 an hour, but when I figure an estimate I may count them as $40 or $45 an hour. Then when I have figured all of my labor and material costs, and added in all of the sub-contractor costs, depending on the size of the job I might put 5-15 percent on top of everything.

So if you looked at my estimate it might look like I only marked up the materials 5 percent, but that's because I covered my overhead costs in other columns. All contractors are going to have overhead costs such as insurance, trucks, fuel, tools,and health insurance. The 2 contractors you have bids from may cover their overhead costs in areas such as the materials, or they could be trying to take advantage of you. That is why I suggest getting a couple more contractor quotes for the work, I imagine there are probably quite a few contractors around a city as large as Oklahoma City, Oklahoma.

I know all customers like to know what each cost on their project is, as they are paying the bill, and I would probably be the same way. However, unless you are setting up your contract with the general contractor as a "cost plus" type of contract, the only figure that should be important is what the contractor estimates the final cost of the project to be, as that is the figure you will be paying. The only other time that comes to mind that the material markup might be an issue is for change orders.

If that is where you are seeing the 20 percent markup on materials, that is because most contractors try to discourage change orders are they are a lot of work for the contractor, and can entail redoing work that has already been done. It can also hold up the project while waiting for new materials to arrive. So in addition to trying to discourage change orders, contractors are also trying to cover any additional costs they may have due to work stoppage on the project.

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