Marking Up Materials
Woodworkers discuss how and why they mark up materials costs in their estimating and billing. May 6, 2009
Question
I have a question that relates to markups on raw materials, lumber, plywood, hinges, slides, etc. Do you all mark up these materials when you bid a job, and if so what seems to be the average markup, or do you just price it on what the job will bear?
Forum Responses
(Business and Management Forum)
From contributor T:
There are many opinions about this as there are woodworkers. Mine is that you need to recover your costs and make profit on everything you sell. If you are not marking up your materials you will make less profit, and maybe not even recover your costs, not to mention that your materials cost you lots of time and motion, square feet of storage area, etc. that have to be recovered somewhere. My choice is to mark up most materials at the same rate I mark up labor (after labor has been marked up with labor burden and supervision). There are some things which I refer to as buyouts, such as steel fabrications, stone, glass that is installed by others, etc. that I mark up at a lower rate.
I also do something that no one else does that I know of, and that is to mark up my labor an additional percentage to cover consumable materials that can't be costed to a job, like sandpaper, glue, tool sharpening, etc. This is a relic from when my company was owned by someone else and I have simply never changed it, but it is historically pretty accurate.
To be clear on the above: I mark up labor with labor burden, supervision and the mark up for consumables and then mark up the result with overhead and profit. I mark up materials with overhead and profit, and buyouts usually with a slightly lower overhead and profit.
Most of the percentages are fixed because of historical costs. The overhead is what it is and the profit is what I want it to be. I try not to think about what the job or the market will bear and instead think about what profit I need to make the job worth doing. Right now it's a little less than it was six months ago because I need work to keep my shop going through Christmas, but the only markup that can change is my estimated profit- all the others stay the same or I am fooling myself.
From contributor T:
I mark up all materials 5% beyond retail cost. Now, if I can get those materials at a discount by buying in bulk that, of course, helps my percentage that much more.
From contributor K:
The only thing I don't mark up is knobs and pulls. I got tired of them saying "I saw them at HD for less" because I don't mark them up I have my customers provide them and I tell them where to order. I charged enough to drill the holes to cover an average mark up and labor. I am always floored at the customers who think I should sell it for what I paid for it.
From contributor J:
If they don't want knobs and pulls at your price, then they can bore holes and buy knobs and pulls at their cost. No hardware, no holes.
From contributor P:
Unless you're doing a time and materials job, why would you mark up your materials? Sounds like a "fudge factor" thing rather than an accepted accounting procedure. If you want more profit, just put in a bigger profit margin. The knobs and pulls issue seems like a regional thing. Here on the east coast, we typically don't include them in the price. The customer buys them from whoever they want, and I charge to install them.
From contributor F:
If you do a variety of work the relationship between material and labor as a percentage of sales can vary widely, one method to capture overhead when you do this kind of work is to add administrative overhead to materials and administrative overhead and shop overhead to labor. This is definitely an issue on jobs where the customer wants to limit overhead and profit on changes and adds. If you have a standard product line or range then you can get all your overhead on labor. We have been using this method for about 22 years. We also use a different OH on install than production.
From contributor T:
There are almost as many answers to this as there are woodworkers. What you have to do is use your estimate to recover your costs and overhead and make your desired profit on everything you do. I am definitely with contributor F- I want to recover overhead and make as much profit on materials intensive jobs as on labor intensive jobs. I find that this can't be done without marking up materials.
From contributor P:
Interesting. I guess it may also depend on how big your operation is. I'm small now, but I've worked for big organizations where we had dedicated purchasing people whose costs were included in overhead. But we also had something called a material handling charge that we applied to materials that we purchased for our subcontractors. Contributor F, are you talking about T and M projects? You imply that your customers have some visibility into your costs.
From contributor L:
The reason we mark up materials is there is a cost that needs to be covered. Not only the cost of ordering, storing and handling but also the cost we call risk factor. Risk factor is often related to material cost. We fairly often have plastic sheets on jobs that cost $1K to 1.4K for a 4x8. We've had Japanese glass that cost over $1K per sheet. My markup on that stuff has to have a risk factor! Our standard material markup is 25%, excluding Japanese glass! You can readily see why materials need to be considered differently than a % for profit. Profit margin goes on after all other items have been considered and is the only variable in the equation. There are also risk factors beyond the normal shop rate burden that we will consider in bidding a job. They go into the calculations just like the material risk factor. They are based on past experience and have proved to be a cost so must be covered.
From contributor Z:
On occasion I have contractors/repeat clients who just want to buy material. In those instances the mark up on lumber and plywoods goes to 50%. Smalls stuff like hardware and accessories get the standard 100%. If they want it for less they can go elsewhere but usually don't. One thing I have learned the hard way many years ago is to spec out your contract as to materials but do not itemize the costs of each item.
From contributor M:
Another very sound reason to mark up material independently from your profit margin is the simple fact that you need to provide a warranty for everything you supply. Even if the product carries a manufacturer’s warranty, once I install it in the clients home it becomes my baby to deal with if something fails, and I don't want that hassle to undermine my profit.
From contributor S:
Why don't you invoice the manufacturer for your time to inspect/replace their defective part if it is still under warranty? If the product is under warranty the manufacturer should pay for all your costs associated with replacing their defective part. When you have a defective part that is under warranty, call the manufacturer and ask them if they are going to send someone to replace the part or would they like to hire your company to replace the part? Ask them for their Return Authorization Number and where and to whom you should send the invoice. If you have to pay for shipping to return the defective part make sure you include it on your invoice and mark that up as well. Always treat your business like a business.
From contributor T:
We do a lot of work, especially but not always, government work, in which the amount of overhead and profit we can charge is restricted by contract. In these kinds of projects we are obliged to show detail, sometimes minute detail, on our change order costs in order to justify getting paid. This is an artform that takes years to perfect, and the presentation of the data can make a big difference in getting paid for change order work.
From contributor F:
Contributor T got the response correct. With our large private contracts they use the same restrictions. I have a set of labor rules I developed that allow me to recapture overhead when doing detailed changes, it is an art form. Contractors are used to paying machine and operator time on expensive equipment so we charge for machine time, unload time, load time, truck load time etc. It looks something like this for every machine in the plant.
Machine Rates
Machine Machine Rate Operator Rate Asst. Rate
CNC Saw $125.00/hr $78.00/hr $ 60.00/hr
