When you enter a contract with a contractor, your final price will reflect their labor and material expenses, overhead, and profit. Contractors are in the business of making money, so this is an expected expense to you. But how much should he be making off of your project?
What are you paying for?
When you hire a contractor, you know you will be paying Labor and Material costs, but profit and overhead will also be added to your price. Profit and overhead will be the amount charged beyond labor and materials. You will be paying the Contractor for his time. Experience and expenses for
the job. Here is a breakdown of what you are paying for.
Labor
Labor costs are self-explanatory. You are paying the Contractor for his labor cost. He will estimate this cost by calculating the time it will take against the hourly wages he pays his labor. He will also add his subcontractor bids to the labor costs and the time he will be working directly on your project. The result is what it will cost you for labor.
Materials
Again pretty much self-explanatory. It costs your Contractor to get the materials for your project, and this expense will include any delivery fees associated with getting those materials to your property. It is also industry standard for a materials markup of 10-15%. This is separate from overhead.
Overhead
These are expenses beyond the cost of labor and materials. Overhead expenses are the cost of doing business. examples are:
licenses
administrative
office rent and utilities
advertising
office supplies
You are not paying for these things in themselves, you are paying a percentage spread across all the jobs projected for the year. Also added to this is the Contractor's oversite over the project. This includes taking bids, Hiring trades, and overseeing the work. Typical overhead expenses add about 9-11%to your total costs.
Profit
This is where the company makes a profit, hopefully. After all the expenses are calculated, the Contractor will add a percentage for profit. The Minimum you will pay will be 8%, and most companies now are adding 10-15% for profit.
Remember, every Contractor is different in calculating these numbers. If you are getting turn-key proposals, they are not obligated to itemize or verify any of the expenses or amounts they put on their proposal . We will talk about the difference between turn key and time and materials in another post. It is also why you should get more than one bid; the lowest is not always the best. You want your project done right, so get several bids and vet the Contractor before moving forward on your build. Do your homework so you get the best contractor for the right price.
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