Builders "profit" margin

[always_learning]

Let's say a builder tell's you that he works on a margin of 10%.

Is that 10% of actual expenses or 10% of industry standard "notional"/"expected" expenses?

ie. If the builder charges me lets say $11K for a garage, does that mean that the garage actually cost him $10K in real costs or does it mean that $10K is the expected costs for a garage of size y*z and thus the builder will charge me $11K due to a 10% margin? Thus if the builder worked a special deal with the garage sub-contractors and had it installed for $8K is it OK for the builder to still charge $11K ($3K profit)?

 

[bundy1964]

A Jenman builder will sell it to you for 8.8K and tell you that the sky is falling on the building world and it needs reform.

A HK builder will sell it to you for 11K and tell you that you are buying at a discount because it should be 13K.

In the real world I would guess they would stick to their quote and pocket the extra 2K as profit and you would never know.

bundy

 

[Nominees]

Yes it is OK...

And yes this is "norme" in the building sector.

But it is the same every where really...

Nom

 

[always_learning]

So if I hear a boo-hoo story from the builder about his/her slim margin, I take it with a grain of salt. A smart builder could work with a 0% margin on "industry standard" expenses and still make a profit.

 

[Nominees]

Yes that is correct. (But again it depends on whether it is a large or small project.)

But rember that if you were to go to the wholesaler yourself you woud not get the discount.

It is like travel agents, mortgage brokers etc... They all get a commission. For builders it is a bit different, but think of it as a comission for them and then they will charge you more money for "actually doing" the job. (This is fine.)

This is how they make a living... Think about it this way: I am not to sure how a mortgage broker would respond if you told him to go halves in his commission... And beleive me, they could do this and still make a good living

 

[D.T.]

Hi Nominees,

Slightly off topic, there are a couple of mortgage broker companies who do go halves with every customer in their commission. This is quite popular with the consumer, and I'd bet these companies make good incomes out of their quanity as opposed to quality like a couple do from this board.

-Regards

Dave

 

[Tools]

I assume that if you would happily take any extra profit that a builder manages to make,then you woul dhappily pay extra if he makes a mistake and underquotes?????I think not!
Tools

 

[Peter 14.7]

I assume that if you would happily take any extra profit that a builder manages to make,then you woul dhappily pay extra if he makes a mistake and underquotes?????I think not!
Tools

Good Point.

That is called Do and Charge and what i use with alot of my clients whom trust.

Why. If I quote I must consider all risks, either write them in or out and allow reasonable "insurance"money.

To be frank, $1 profit on a $10k costs is not much return when you have unpaid time spent in design, quotings, estimating, visiting the site, paying your bills, GST in and out.

If I Do and Charge and I thing say $10k and it comesin at $8,800 I give it back. If it goes to $11,200 I charge more.
Saving to me in risk factor and time spent in quoting jobs I dont get.

Peter 147

 

[Kristine..]

Hi always_learning

Major and Minor Domestic Building Contracts are available for purchase at hardware outlets such as Bunnings for about $40.

These Contract pro-formas include space for the builder to disclose the operating margin to the customer.

10% is very low. After all, for a job this size he stands to earn only about $1000, less GST, $900. At a professional rate of $50 per hour that's 18 hours.

The Contracts make provision for the builder to tell you 'that's how much the materials cost' and that's how much they cost. If you withdraw materials from the quote and substitute them with other materials, eg withdraw galvanised guttering and replace with Colorbond or viceversa, the builder is entitles to make whatever adjustments they see fit, including retaining their margin if, for example, you wanted a tool cupboard then decided not to have it after all.

The builder has had to measure and quote for the tool cupboard or contact a cabinet maker for a quote, and just because the customer decides they can live without it the builder is still entitled to claim their on-costs regardless.

If, on the other hand, you have organised to have the builder do his own work and supervise the work of others eg the plumber or drainer, and you have negotiated an hourly rate, then the builder is entitled to charge a supervision fee for when he is on site overseeing other contractors.

It would be no surprise if the hours applied to the job exceeded 18 hours and the labour charge to the customer was significantly higher than the $1,000 margin as quoted.

At under $12,000, keep in mind that the job is also likely costed to be under the $12,000 Builder's Warranty threshold. It's amazing how many jobs get costed to $11,995. Which means no insurance and no warranty. However, if you decided that you wanted a nice cupola on the roof to finish the job off, and that would push the quote to $12,050, don't be surprised if you are told 'Listen, mate, I'd have to charge you $395 to go to Bunnings to get the cupola and fit it, they're only $123.50 off the shelf, why don't I leave you a bit of flashing and a few nails and you can do it yourself? Save yourself $395 and you can do it yourself in an afternoon!'

Please don't think me cynical - some of my best friends are builders - but it is very common for builders to 'helpfully' suggest that the customer 'deal direct' with the tiler or the painter or whatever, so that the builder does not have to quote for that part of the job and the 'cost' stays under $12,000.

But it's a tough game, the building game, and if your builder can do the job you ask for at the price you're happy with, then good luck to him if he can get the bricks laid in 13 hours not 15, or he can source guttering cheaper than he thought he could. Provided that you get what you specify eg 'two coats of Dulux paint' and not get fobbed off with 'buy one, get one free' no-name paint which peels off like sunburn, everybody's happy.

Cheers

Kristine

 

[stickysandwich]

Hi, Always Learning,

This is how we charge. We are builders. We usually do renovations and additions.

Firstly, we only do charge-up jobs, because we never know what we will find under the roof or floor. We charge 15% on top of costs.

A carport, for example:
Materials - $7,000
Labour - $5,000

Materials $7,000 minus GST ($700) = $6,300 x 15% = $945
$6,300 + $700(GST) + $945(15%) = $7945

Labour $5,000 minus GST ($500) = $4,500
$4,500 + $500(GST) = $5,000


TOTAL COST = $12,945


How's that? Easy.
That's a profit of $945.00
Not a lot really?

Need a cup of tea now.

SS

PS, We don't charge 15% on labour

 

[Tools]

Great to see there are others out there who actually understand what goes goes on in the building game.Here is my scenario.I am doing a $1.9m commercial project.When we tender,we work on 2-3% profit,or we wouldn't get the work,as there is always someone who will better your price.So at the very best we COULD make $57000,if everything went smoothly (which it never does).That isn't much potential profit for such a big risk.Union action can easily turn a job in to a loss making effort.We did a $1m recently,and somehow the estimators left out a lighting bar that ended up costing $30000.All the potential profit was gone in an instant,before we look at any of the other things that go wrong or costmore than anticipated.It sure isn't all beer and skittles in the building industry,but it isn't all that bad either.

Tools

 

[blossomoz]

These sorts of posts are really good as it lets us know how things really are.

We run a small business & people are shocked at out prices, though we are cheap in our industry. The fixed costs in business are high & we know what we have to pay, but we don't know what other types of businesses pay.

thanks
blossomoz

 

[willair]

I am doing a $1.9m commercial project.When we tender,we work on 2-3% profit,or we wouldn't get the work,as there is always someone who will better your price.So at the very best we COULD make $57000,if everything went smoothly (which it never does).
Tools,
im still trying to get my head around what you have said,if everything is subbied out and you must manage the project in some way,why even take
this contract on if the end profit is maybe $57k,so much can and will go wrong over the building period,imho as a plumber i know the system
backwards the only way you can make money is hold payment on the subbies then they walk off the job,and you go backwards fast......
TTS.
good luck
willair..

 

[kissfan]

Hi Nominees,

Slightly off topic, there are a couple of mortgage broker companies who do go halves with every customer in their commission.

Does this include the trailing commission?

 

[Tools]

Hi Willair,

We take the contrract on because we could make the profit.I don't know if you work in domestic or commercial,but in commercial work,the margins are considerably lower,and the risks much greater.We don't subbie everything out.We have our own carpenters,so all of that is done in house,a boiler maker who does some of our smaller steel works,as well as labourers.Commercial work is more complex than most domestic jobs,and it is hard to find for example carpenters who want to work in the commercial scene,given the increased risks and costs,who are capable and willing to put a price on a project.Don't get me wrong,the company does make money on most projects,but the risk is always there that there could be a loss.Look at liquidated damages.In domestic work it may be a couple of hundred dollars a week which basically covers the rent of the people who own the house.We did a job recently where the liquidated damages were $10,000 per day.Businesses have so much more to lose,and so we carry such a big risk.I am not sure what you mean about holding money on the subbies.We only do that if they haven't finished the job,or not finished it in a tradesman like manner,or if we are still waiting for as built drawings at the end of the job.Holding $10,000 quickly sorts that out!

Tools

 

[willair]

I am not sure what you mean about holding money on the subbies.We only do that if they haven't finished the job,or not finished it in a tradesman like manner,or if we are still waiting for as built drawings at the end of the job.Holding $10,000 quickly sorts that out!

Tools,
Thats the reason i walked away from plumbing 4 years ago
and from what im told its no different today,i like the way you say
finished in a tradesman manner,as you know using commercial arbitration
sometimes means significant cost saving for the builder.
good luck
willair..

 

[stickysandwich]

Well Wllair,

Don't forget we also charge for our labour, which at the moment is around $45/hour. Though this is not considered profit, $45/hour is reasonable money.

SS

 

[willair]

Don't forget we also charge for our labour, which at the moment is around $45/hour. Though this is not considered profit, $45/hour is reasonable money.

Stickysandwich,
then what do consider is profit,at the end of the day.
do you work for the same company?,i used to think $80.00/hr
was ok,but one hour of my time nowdays is worth more than
then anyone can pay me because im free to play what ever market
i want with my own cash and time..i hope one day you will be the same.
good luck..
willair..

 

[Tools]

Hi Willair,
I have no idea how commercial arbitration saves the builder any money.

Are you saying you think it is unreasonable for the builder to hold money (I did not say keep the money) until the subbie has completed what he is legally obliged to do by the contract he has signed?On a much smaller scale,would you be happy to go to Safeway to get product X,which Safeway does not stock,but pay them the $10 cost of product X hoping that one day they might get it for you? It is unfortunate that many "tradesmen" have no pride in their work,and are happy to leave a new building with a leaking roof,or downpipes that are out of plumb.You think it is unreasonable to hold money until these DEFECTS are fixed? Why should builders accept second rate work,and why should the builder's client accept a second class building? At the end of the day,it is the builder's reputation and good name that are on the line.The builder is the subbie's client,and the subbie's reputation and good name are on the line to the builder.I am sorry,but mediocrity is not acceptable on any of my projects,and the only way to make subbies lift their standards is to hold money on them.If they still won't rectify defects or complete their contract,we are then able to get someone else in to do it at their expense.

tools

 

[JoannaK]

In our line of work the banks like to see us working on a building margin of 5%, and we also hold 5% retention off all our subcontractors for at least 3 months after the building has been handed over to the purchasers.