Markup for Time and Materials Jobs
A discussion of costs, overhead, and invoicing practices. October 2, 2006
Question
I am veteran carpenter and a rookie business man. I recently started my own business, a one man show, doing mostly time and materials residential remodels, and I am wondering what is a fair percentage to charge for overhead and profit? My contracts are cost plus percentage fee. The contracts state that I mark up materials purchased on my accounts at 10%. What is the general range for mark up of construction materials? Is it fair to also mark up my hourly labor rate 10% and use these markups for my companies’ overhead and profit? What would the best way to present overhead and profit costs to the customer on my time and materials invoices? Should I be building these markups into my hourly labor rate and not advertise to the customer that everything is charged a 10% contractors fee to cover overhead and profit and still pay myself a good hourly rate, or spell it out in bold on the invoices?
Forum Responses
(Business and Management Forum)
From contributor A:
Time and material is what it is on the bottom line of the bill to your client. He has no need to know how you got there. Hopefully you are in business to make a living and a profit.
From contributor B:
On my last time and materials job, I estimated, shopped for, bought and delivered the materials and only upcharged 30%, which I think was a deal for the customer. My invoice was a list of what I bought plus markup without pricing detail. The time part was billed as empty hours at $/hr for finishing, building and installation. One of the things I've learned from WOODWEB is to not undervalue your work.
From the original questioner:
Thanks for the responses. Of course I want to make profit. I'm just too new to know what my market will bear. I also do charge my hourly labor rate for estimating, takeoffs, planning, material pickup and delivery. I've just been wondering the common practices for breaking down costs on my invoices. It seems everyone has his own way. It’s nice to hear that I shouldn't have to explain how I arrive at my total cost of work to the clients. My current invoices are still broken down into three sections - labor, materials, and contractors fee (10% of labor and materials total) and then the total of all three - the balance due. I may be giving too much information and not enough markup! Thanks for the comments.
From contributor C:
You need to recover your overhead by charging the appropriate labor rate. Your time is all you've got to sell. Work out how much time you want to sell over for instance a year, and how much money you want for that. Add up all your overhead. Divide your overhead by your hours, and that will tell you how much you need to add to your labor rate to cover your overhead.
From contributor D:
Besides the commonly used method of billing called "time and materials" there is a lesser used method, the one I use, called "cost/plus". In cost/plus billing you supply the customer with a copy of the invoices to their job (the cost), and they get to see precisely what they have bought and what it cost them. You bill them for an agreed upon percentage (the plus) of the total invoices. You would not of course, bill them for a percentage on top of your own labor, but your labor rate should reflect a price that includes your overhead and operating costs. I like this method because it puts everything out in the open for the customer to see and when all is said and done, they have less room to argue about the end result since they will be approving all purchases by seeing all invoices to all purchases. Typically I get 20% for cost/plus work done.
From contributor E:
What are your overhead costs? What is your income goal for the year? How many hours do you expect to work this year? How many employee hours do you expect? If you are the only one working, then add overhead costs to your yearly income and divide that by the number of hours you think you will work. If you want to make a lot in less time then you need to charge a high hourly wage. If the market will only support a certain wage then you need to adjust the number of hours worked. It doesn't much matter if you call it profit or wage if you are the only one working ($36 per hour + $4 profit is $40 per hour and $40 per hour wage is $40 per hour). No need to confuse the customer with what is wage and what is profit. This is commonly referred to as a "loaded" number.
The overhead and profit numbers get to be more important when you have employees and you are making your income off of their hours. You can still present it to the customer as a loaded number, but it is more important to you to make sure that the percentage of O.H. + profit is correct. Again you would take the amount of money you need to make and divide it by the number of employee hours worked, then add that to the employee's hourly wage, + an hourly overhead markup. If you get big enough, your salary becomes part of the overhead markup, and profit is a separate issue, but as a very small outfit, it's not too important what you call it, just make sure that the total amount is enough.
From contributor F:
I have a larger business and I avoid doing time and materials because I find that it's hard to recover all of the costs, but when I do engage in a time and materials project I put my hourly rate in the proposal- mine varies in different situation but usually is about $60 for shop work and $75 for field work, which covers all costs associated with labor, my overhead, and the profit I want to make. I also state my materials markup. Then I report the number of hours worked and show invoices for the materials. If the customer wants to assume all the risk that I assume when I hard bid the job, and they know what the rates are going in, then they have nothing to complain about when they get the bill. This is the way mechanics have worked from time immemorial- their rates are usually posted on the wall.
