A friend told me about a building owner he knows who pulls a scam on general contractors and subs. He hires them, then tries to see how low they’ll cut their price on the job they’ve already started. It’s almost like a hobby or a game to him; he has several properties and is quite wealthy.
He waits until the job is started, then begins asking questions about their markup. “How much is your markup on labor?” or “What’s your markup on materials?” He’ll ask the contractor how much they paid for items on the job. He keeps this up for several days until he sees the contractor getting nervous, then he approaches them and says they need to renegotiate the contract because he can’t possibly pay the outrageous fees they’re charging. One contractor working for him renegotiated his markup down to under 12% on labor and materials with no markup on the subs.
I am sure that you’ve heard this or similar stories. Some people view contractors as uneducated louts which makes them easy pickings; others think all contractors are dishonest so it’s fair to take advantage of them. They’re both wrong, and you need to protect yourself. Keep a few things in mind:
- Some jobs aren’t worth having and some people aren’t worth working with. If you find a building owner or general contractor who wants to dictate or negotiate your pricing, walk away and encourage your friends to do the same. Think long and hard about getting involved, then don’t. If you want a friend, buy a dog.
- Always make it clear that your price is not negotiable. They can tell you what they want done, when, where, how wide or long, how tall and what color. You’ll tell them your price to do it. That’s the end of the conversation other than “When do you want to start?” If they don’t like your price, they can change what they want done. If they want to change your price, you need to walk away.
- Your markup is proprietary information. If someone asks, don’t be bashful, tell them that, “It’s proprietary information.” If they push it, you might ask them how much money they make, what did they pay for their house, how much they weigh, how much does their spouse weigh, where do they buy their clothes, how much is their car worth? Some things are nobody’s business.
- Always begin with a signed contract that has a clear, firm price specified before you start any work. Include an easy-to-understand payment schedule in the contract, we talk about payment schedules in the book Markup & Profit Revisited. We talk about contracts in this article, including where to start if you don’t have one. If you’re in the habit of starting jobs without a contract, you’ll run into a client like this sooner or later, and it might cost you your business.
In your contract, include language that gives you the right to cancel a contract if the client is non-compliant, such as being late with or missing a payment. If that happens, the client owes you for all labor, materials, subs, and other costs plus at least 50% for overhead and profit. Check with your attorney on the verbiage, but get it in your contracts. Contract language like this will often expose the shyster upfront and you won’t have to worry about walking away. They’ll run!
You’re in business to provide a service and make a profit doing it.
Don’t fall prey to nonsense from clients, and don’t accept that kind of treatment. If they object to your fair price, walk away. If they object to your fair price after signing a contract and having you start a job, protect yourself, walk away as soon as possible, know your lien rights, and warn your friends.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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