With construction, no other mutual bond has such a high dependency on each other as the contractor subcontractor relationship. If the relationship is developed properly and with a mutual understanding, it can be very successful.
Construction Industry Standards
The construction industry has standards of performance and cost ratios. These standards and ratios are evaluated to determine if your business is performing well or below what is considered reasonable. Use construction industry standards to improve your contracting company.
Every construction project has costs beyond the direct costs and the contractor wants to earn a profit. To cover these costs he must have an appropriate markup. The contractor must give consideration to many variables and circumstances to calculate the best markup for a construction project. To determine the best markup percentage on costs, the contractor should consider his indirect costs, overhead, taxes, and final profit desired.
For any company, profit is based on the risk reward concept. With construction, what should be the profit (reward) given the risk? What is a reasonable expectation given the industry and the particular business?
There is no single correct answer. The construction industry is divided into several significant branches. This article is focused on the residential contractor.
From the new home builder to the re-modeler, a reasonable profit given the risk should be no less than 9% AND this is net after a reasonable salary to the owner for his management role. This is the take home or actual bottom line profit; the amount after taxes. How do you derive such a figure? How do you determine the markup on the construction project to end up with this profit?