Baloney detector

Departments - Travels with Jim

Subscribe
February 7, 2018

Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.

© LauriPatterson | iStockphoto

They’re called hoagies in Pennsylvania and are usually filled with sliced country-cured ham, cheese, fresh shredded lettuce, tomatoes, onions and mayo. In Massachusetts, they’re called grinders. The meatball with marinara sauce is perhaps the most popular. My favorite, however, is the Italian sandwich from Maine. It’s loaded with ham, provolone cheese, onions, black olives, dill pickles and tomatoes, smothered in olive oil and sprinkled with salt and pepper – all on a delicious freshly baked foot-long roll.

Whenever I drive across the Piscataqua River Bridge from Portsmouth, New Hampshire, into Kittery, Maine, the only items on my menu are Italian sandwiches (and Maine lobster). While the name and inside ingredients might vary around the country, the sub sandwich is an enduring American tradition. The fresher the contents the better – no stale bologna in these delicatessen delights.

Like the sub sandwich, the name of your subs and their contents may vary (plumbing, irrigation, electrical, fencing, pools, etc.). However, by any other name, a sub is a sub.

How it works in the field.

Mike called from Pennsylvania, asking how much he should mark up the subcontractor costs on one of his projects. The sub was going to clear and grub a property, then soil prep and seed it. Finally, he was going to cover it with jute netting. The cost for the sub to do this was $100,000.

I asked Mike how much he was thinking of marking up the cost of the subcontractor. He had been taught the multiple overhead recovery estimating system (MORS) and to mark up subcontractor costs by adding 5 percent to cover general and administrative overhead costs and 10 percent for net profit. He replied 15 percent. I asked him how involved he’d be supervising the subcontractor. He replied that he had worked with this very good sub on many occasions and that all he’d have to do was to make a phone call to tell the sub when to start and send an invoice to the client when the work was done.

Me: “So you want to charge $15,000 to make a phone call and send an invoice?”

Mike: “Well, I guess so.”

Me: “How about if I either make the call or send the invoice and we split the $15,000?

Mike: “Chuckles.”

Me: “If you can get it, by all means charge $15,000 to make a phone call and send an invoice. However, would you be willing to take $5,000 for doing so?”

If the market would allow him to charge $15,000 (15 percent), by all means do so. He might want to lower the net profit percentage. He should also lower the 5 percent ($5,000) to cover G&A overhead costs.

Industry pricing benchmarks.

The market will usually allow you to apply an all-inclusive 10 to 20 percent margin to subcontractor costs. Occasionally, a higher figure is used and in extremely competitive situations, subcontractor costs are simply passed through, not marked up at all. The 15 percent margin is intended to cover some G&A overhead costs and net profit, but not necessarily costs associated with direct supervision of and coordination with the subcontractor. These costs are often added to the cost of the sub.

Just as a supplier gives you a discounted “re-wholesale” price for the materials you buy, so should a subcontractor give you a discounted re-wholesale price for the work that he does for you. A subcontractor should give the homeowner a retail price and you a lower price.

Think of it like a nursery or supplier that buys plants at a wholesale price, sells them to the homeowner at a retail price but sells them to the contractor for a discounted re-wholesale one. The contractor usually brings much more business to the supplier than does a single homeowner. Also, the contractor does the selling for and requires less advertising from the supplier. Viewed from the subcontractor’s perspective, he should give you a re-wholesale price because you are doing the selling. Similarly, the sub should pay you an 8-10 percent commission for selling the jobs in the form of a discount. An additional 5-10 percent discount is warranted to help cover some of your G&A costs.

Remember these pricing levels:

  • Retail (or list): The price paid by the homeowner to the supplier.
  • Re-wholesale: The discounted price the contractor pays the supplier.
  • Wholesale: The price the supplier pays to the grower.
Baloney detector.

When you work with your next subcontractor, get out your baloney detector. Show him this article if you have to. But don’t allow your subs to feed you a bunch of baloney in the form of an inflated price.

Jim Huston runs J.R. Huston Consulting, a green industry consulting firm.