We often hear of home or building owners claiming that contractors overcharged them for work being done on fixed figure (lump sum) contracts. The claim is usually that the “construction industry standard” is Cost plus 10%.

Let’s be clear here, there is no such industry standard. There never has been and there never will be. If you have read our book Markup and Profit; A Contractor’s Guide, you know that few contractors can operate a business and breakeven at cost plus 10%, let alone make a profit. The idea that a contractor can survive at a low markup defies the mathematics of basic business and common sense.

Our belief is that this “industry standard” of cost plus 10% was created by architects. At some point, an architect put a limit in their specifications of cost plus 10% on the amount the contractor could charge the home or building owner. The reason for the limit was to help the architect or designer look good to the building or home owner. In short, they helped “save” the owner some money.

That grand idea was passed along to other architects, and first thing you know it is cropping up all over the country.

I have talked with several contractors about this and some have been badly burned by these specifications.

Even worse is the recent ploy of putting specs into a job that limit change orders to COST ONLY. No overhead and profit margins are allowed. The contractor is somehow supposed to extract any money they need for overhead and profit from the original contract amount.

How do you combat this nonsense? Here is my best advice:

Don’t take any jobs where someone else tries to tell you how much you can charge for your work. (This includes architects, engineers, owners, government entities, insurance companies or commercial companies.) Your price is your decision alone. If all contractors would stick to this rule, this nonsense would go away because companies that try and dictate what contractors can charge simply couldn’t get their jobs built.

If anyone claims you are overcharging, tell them to put together their own estimate, in writing, on what the costs are, and what they feel are adequate overhead and profit margins for a construction company to build that job. In many cases you will find that they will drop the claim because they are throwing nonsense at you to see if it will stick. If they do in fact put together numbers for you, it should be very easy to find what they’ve missed. They will not have adequate numbers in their “estimate” to cover overhead for any company, and the same would hold for profit. A quick check of most government required fees for contractors in the form of licenses, bonds, insurance, etc., that are heaped on us will exceed the 10% figure alone.

If you run into an architect or designer that puts these limits in a plan, tell them, in a nice way, to draw plans and stay out of the business of telling you what you can or should charge for your work. Plain and simple, they do not know. By the way, the architects and designers that are putting these Cost or Cost + 10% figures on their specs are charging their customers far more than cost plus 10%.

If you have a case where you are not sure how to handle the claim, send me an e-mail and we can talk about it. If we need to talk on the phone, we can decide that after you have sent along the facts of your case.

And remember to read the specs on every job before you decide to get involved. It’s the small print that carries the surprises.

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Diana McNab
Diana McNab
May 10, 2017 1:12 pm

Is it legal to mark up the materials you purchase for a subtotal with all your other cost and on top of the add your Overhead and profit percent%

scubydoo
scubydoo
March 2, 2017 6:29 am

Also, Architects main responsibility is to the life, safety and welfare of the general public. We don’t just sit in air conditioned offices drawing pretty little pictures like many people think. Most of the work we do is to make sure that buildings are safe and non-life threatening for the occupants. Secondly we want the buildings to actually function for the owners who are paying $$$$ for a design that maximizes their profit potential (while keeping them safe). We don’t pretend to and don’t want to “build” the buildings. That is the contractors responsibility. Architects build buildings today in the… Read more »

racer11x
racer11x
March 30, 2017 5:38 pm
Reply to  scubydoo

(We find and solve the construction problems BEFORE the building is constructed. NOT:)
Now that is a good one. then why do we have to tell the Architect at every site the prints are incorrect and if done as they suggest on the print, the mistake becomes exponential to the rest of the build.
We correct the Architects all the time.

scubydoo
scubydoo
March 2, 2017 5:50 am

Commercial contractors have the option of signing into multiple AIA agreements/contracts between the Owner, Contractor and Architect. These agreements are clear, concise and legal contracts. If contractors feel they are not treated fairly they have the option of not entering the contract or seeking legal recourse through the courts or arbitration. They may also lobby Congress and the AIA to adopt changes to current AIA/Owner/Contractor contracts. For the record, Architects design fee is generally 7-8% of construction costs and has not changed in my 30 years in this business. I wish we could charge 10% and get away with it.

Dave Murray
Dave Murray
February 5, 2017 12:04 pm

Interesting Article! The truth is if contractors are doing a 10% markup on costs is not the true profit. Why? Because profit is calculated on sales NOT costs. e.g. Project cost = $10,000, 10% markup = $1,000 resulting in $11,000 in revenue. The profit percentage is $1,000 divided by $11,000, which is 9.1% profit. So… if contractors want to stick to this rather archaic bidding system they need to divide their cost by .90 to achieve a true profit of 10%

Andrew Fabbri
Andrew Fabbri
February 25, 2016 11:35 am

I agree that their is no industry standard on change order work but the advice you are espousing is laughable. Any Owner with a hint of sophistication will limit the amount of money a contractor is entitled to on change order work. A standard AIA or ConsesusDocs contract will set limits on the amount a contractor can charge for either E&O changer orders or Owner requested changes for both the increase and decrease of the contract price. If a contractor took your advice and, “Politely told Architects to, draw plans and stay out of the business of telling you what… Read more »

aa_apa
aa_apa
June 17, 2015 9:43 am

I’m an architect and completely agree in general. Designers have no business dictating costs to bidders – just like means and methods, and thankfully in my office we never do. However, if anyone thinks that Architects are charging or receiving a larger fee from a client than the contractor is, then you’re sorely mistaken. There are still many people who think that 6% of construction cost is an acceptable fixed maximum fee for architectural design and CA – which I believe was the lowest suggested fee by the AIA before getting slapped with anti-trust litigation. Fixed fee has become the… Read more »

Heratio
Heratio
November 1, 2014 12:23 am

Hi, an interesting conversation. I run a construction company in London specialising in very high end detailed fit out. We carry out a frame work contract for one particular client, we charge prelims for direct project costs inc on and off site management, access, CDM compliance down to tea and coffee etc. Our Specilaist sub contractors account for 40% of project costs and this is open book to the client and the remainder is made up of in house workers and prelims (closed book) on top of the above we then charge .49p for every pound to contract value for… Read more »

hazy
hazy
May 7, 2014 9:46 am

Who are you kidding man? I have stucco guys that mark up materials they get from the local home depot by 200%. I’m effectively paying them a hugely inflated transportation cost. If they want to charge for hauling/delivery, fine. But don’t lump that figure in into materials cost. Materials are manufactured by ANOTHER company, itemize it properly.

Yes I'm an architect
Yes I'm an architect
April 2, 2014 9:25 pm

Demonizing architects makes you sound very stubborn and jaded. Like you said, if you don’t like the terms, don’t sign up. If you sign up and haven’t read or understood the terms of the contract, than shame on you, you deserve what you get. Welcome to the real world. There are as many crappy contractors out there as architects, so I don’t know what all the industry griping is about and as an architect I refuse to fuel it. Get over it, and don’t do work for bad architects. Also, don’t do work for “designers”. These are not architects, architects… Read more »

Chad
Chad
September 23, 2010 5:36 pm

I understand the sceme of what you are saying but but have to respectfully disagree somewhat. We have run cost + x% projects before and they can be a useful tool for things like difficult remodels or simply where your just trying to keep cost down for the client. It is my strong understanding that the “COST” portion of cost+ includes ALL operational expenses including your overhead mark-up. The trick is knowing EXACTLY what that % is and it has been my professional exerience that most don’t even have a clue (Almost always the ones who get burned). We run… Read more »

Bill at Grand-Dads Toolbox
Bill at Grand-Dads Toolbox
July 13, 2010 5:36 pm

One thing that is interesting to note and remember with regard to architects is that most of them have NEVER done the work that their designs dictate the contractor to perform. So let’s see, they spent a whole lot of time in air-conditioned environments learning to draw pictures of buildings that are allegedly constructable by qualified yet albeit underpaid contractors. I don’t recall anything in the architect’s job description that qualifies them to set prices for anything a contractor would do. Maybe I’m jaded because I work for a living, and have had occasion to deal with MANY high-priced yet… Read more »

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