Some contractors mistakenly think the markup they make from subcontractors is pure profit, but if you do this you are underestimating your overhead recovery.
To understand better, do the following:
1. Calculate your overhead activities and costs associated with subcontracted work. It consists of marketing, sales, billing administration, project management, some insurances, warranty, risk, etc. This will help you understand your break-even on subcontracted work.
2. Figure out how much it would cost you to do the work yourself. Work through an estimate—assuming it is work you can do—and see what it would cost you. If your cost is the same as your subs, then your normal markup and margin can apply.
3. After you go through the exercise of creating an estimate, seek out bids on the work using your cost as the baseline. See if you can hire subs to do the work at the same cost (or even less). This will help you gain a better understanding of how your costs compare with a subcontractor’s, and thus how your pricing will be viewed in the marketplace.
Even if you find the sub’s costs are higher than your in-house costs, you can still sell sub work at high markup if you package the work so it appears to the client as part of a whole, and not as piece-meal work.
Here is how you implement this: Raise your subcontractor markup 5 or 10 percentage points at a time, and see if you get resistance. If you don’t, raise them again. Over time you will find out what the market will bear. Don’t believe your poor competitors, nervous employees or own head trash. Take a risk and find out for yourself.
