General Contracting and the Rule of Thirds
When a leaky pipe needs fixing, a porch needs building, or a house needs remodeling, many homeowners hire a contractor to get the job done. Home improvement contractors are those who agree to fulfill the demands of a contract securing a service between two or more people within the context of the interior remodeling and outdoor living space industry. In any standard contract, money is exchanged for these services, but where do contractors get their price quotes from, and how can you tell if their estimate is legitimate?
Contractors come from many fields and specialize in many different areas, such as framing, trimming, and concrete. There are also general contractors, who tackle big picture jobs like building an addition, constructing a porch, or remodeling a bathroom. Many general contractors have their own crew of laborers to complete the job, and may hire sub-contractors to handle certain specialty tasks.
In exchange for building a new screened porch, fixing up a kitchen, or installing new trim, homeowners make payments towards an amount that is estimated and agreed upon before the work begins. Here is a typical breakdown of total project costs for an average home improvement job:
- 33% goes towards materials. One third of the total project cost usually goes towards materials, including building supplies, fixing, and finishing materials, as well as special tools and job equipment. This price may also include costs to protect existing structures and equipment delivery to and from the site. This portion of cost may be affected by the quality of materials you choose, as well as the complexity of your project.
- 33% goes towards labor. You can expect a third of the project cost to go towards labor. This may include the salary that your contractor pays his work crew and other employees, as well the payment he makes to hired contractors. Major factors affecting labor cost include the complexity, size, and location of the project.
- 33% goes towards gross profit. Some homeowners mistakenly believe that gross profit refers to the amount of money a contractor receives. However, the vast majority of gross profit (typically around 23 to 25 percent) is used to pay overhead expenses.
Overhead expenses usually cover the general costs of running a business, including legal fees, insurance, accounting, employee expenses, construction management, sales commission, and office expenses. If around 25 percent of gross profit goes towards overhead expenses, a contractor will only make an average of about seven percent in profit from a job. In some cases, a contractor who manages a project exceptionally well may be able to bring this up to 10 percent—but this is rare.
You may also be interested in:
- "What to Look for in an Estimate"
- "Why Lost-Cost Contractors Cost More in the Long Run"
- "7 Important Questions to Ask Before Hiring a Home Addition Contractor"
Be wary of any contractor who promises more than five percent discount on a project, as this is a substantial markdown. Contracting a project at a deep discount can be very risky, since the contractor may cut corners in labor and materials to try and make due. In worst case scenario, a contractor may run out of money midway through a project and be unable to see it through to completion. If you are a homeowner, your home may be one of your most valuable assets, and it doesn’t make sense to hire the cheapest contractor you can find to manage its well being.
In the end, a contractor needs to make a gross profit in order to grow and maintain their business. By paying a bit more upfront for a quality contractor upfront, you not only ensure quality work, but less repair and maintenance fees in the long run.