Construction budgets: Wholesale Versus Retail
January 26, 2010 6:56 PM   Subscribe

How different are "wholesale" vs. "retail" construction cost estimates? Is there a reason that numbers are varying by 100%?

Thanks to everyone who answered my last question. I might be buying a fixer-upper house. I have now gotten a good inspection and cost estimates from three contractors. One contractor, a friend of a friend, came up with a construction budget that is around half of everyone else's.* My question is whether I can really rely on those numbers.

I care for two reasons: I have to choose a loan amount that includes a construction budget, and then I can't increase the amount for construction. I could get a loan for almost the full amount others are suggesting, so I could always err on the high end. But the other reason I ask is that I'm trying to figure out whether it makes more sense to work with this particular contractor (which it might, if it costs half as much!). If it's going to turn out to cost the same amount in the end, I might pick a contractor whose way of thinking and working is more similar to mine.

When I asked why the numbers were so much lower, here are the reasons I've heard:
- The low amount is "favor" pricing. Since I'm a friend on a limited budget, he could get the subcontractors to do it much closer to their own cost for materials and labor, including their own time, but without much of an additional profit margin.
- The retail prices are higher because contractors have to price in other costs of doing business (like the time they spend finding a new job).
- Some building contractors inflate prices a bit because they don't want to lose money if the client skips town right after they buy the materials, so the up-front payment has to be a certain amount.
- There are contractors out there right now who just want to keep their crew busy. They know they aren't going to be making any money now, but they want to keep their trusted guys from looking elsewhere for work.
- There's a lot of double-counting in typical fast estimates. If you ask someone for a price for a kitchen, they assume you'll have to do some plumbing, electrical, and tile. But my budget already has plumbing, electrical, drywall, and flooring in other line items.
- Looking at the RS Means book, it does sound like there are a lot of markups. If I'm reading it right, it sounds like the subcontractors take a 10% markup on materials (even after including the cost of delivery and unloading), and a 10-20% markup on labor (even after including Workmans Comp Insurance and other overhead into all the hourly costs), and then 10% profit separate from all of that (even after including their top guys' hourly wages in the labor costs), and then the contractor adds 10-20% profit on top of that. So, he would give me the subs work at the price they charge him, and he would help me avoid the materials markup using his accounts at different suppliers.
- I did try to think through everything that went into a kitchen, looked at the "as installed" prices on tile and everything, looked at RS Means for materials & labor on other work (their labor price even factors in Workmans' Comp insurance), and sure enough -- it came out to 20-50% of the estimates I got.
I'm normally skeptical of things that seem too good to be true, and I also want to pay people fairly for their hard work. But I don't want to suspiciously discount the statements of a friend who builds projects on-budget and is offering a favor. And I don't want to pay retail if I could be getting the same product for wholesale.

What do you say, Metafilter? Any chance I can trust this lower budget? How could I verify the line-by-line to see how the numbers add up?
posted by slidell to Work & Money (13 answers total) 1 user marked this as a favorite
 
One difference is that some folks are giving you a bid, some are giving you an estimate. A bid is a quote: I'll do this job for this price. The contractor includes possible overruns of time and material, so it's likely to be higher, because they don't want to be short money if the job turns out to be bigger.

An estimate will be more like, "I estimate it will cost X dollars do to this job, based on Y hours at Z rate." The price isn't guaranteed, but it's the most fair (imho), because you are paying for the actual work. It might be more or less than the estimate.

Some folks will charge you cost plus for materials; others will charge you for their work only.

Have you gotten references from these folks? Has the friend of a friend done work for people you know? And have you clarified if you are getting bids or estimates?

And fwiw it's worth, fixers always have surprises, and things seem always to cost more. But good luck! How fun!
posted by bluedaisy at 7:08 PM on January 26, 2010


I would err on the high side- it's hard to do projects like this with friends - let's say he gets a real good juicy job elsewhere, he might take longer with yours, send his best crew to a different job, etc. Remember the fact that he's doing you a "favor" works both ways.

If you err on the high side, and have money left over, you could just use that cash to pay back the mortgage faster, and end up just about even.
posted by unexpected at 7:09 PM on January 26, 2010 [1 favorite]


Well much of the cost in construction is labour. If you've got a friend that will discount his wages then that's really worth considering. I've had my plumbing done by a friend and he usually gives me his labour for free which is about 40% of the cost of the job. Also it's nice to have someone to call for follow up etc. Regardless of who you pick check references and go and see (in person) similar jobs that the've completed so that you can make sure that you are happy with their style of fit and finish.
posted by saradarlin at 7:11 PM on January 26, 2010


Whether it's a friend or a relative or someone you've never seen, you want to see CURRENT license, CURRENT bond documents, a SOLID contract, and REFERENCES.

I say this as someone who hires contractors for a living.
posted by TomMelee at 7:39 PM on January 26, 2010 [3 favorites]


100% markup above BOM is pretty common across many industries. It might sound like a lot but, by the time you figure in labour and overhead, it's not.

And, to echo the comments of others, what you often get in return for a huge discount is shitty service. Other customers paying full price will always come first.
posted by randomstriker at 7:40 PM on January 26, 2010


As someone who took a huge beating from a contractor that skipped town, take TomMelee advice X's 3
posted by JujuB at 7:52 PM on January 26, 2010


Response by poster: Thanks for the answers so far. I have checked the state's online contractor-license lookup, so I know that he is a licensed contractor that is bonded and insured. I've seen a past project and have a list of references (which reminds me I should call them). I don't have the contract yet.

My main question is: can this price be a reliable estimate? How could I prove to myself that this lower price could be achieved when I hear a higher price from several others, and when this friend-of-a-friend is not the type to sit down with an extensive spreadsheet?

Also, a clarification: I don't actually think I'd be getting too much of his labor for free. I think he'd be paid if he were to take a day and actually build or install something, but that he'd take less for his efforts to check in on others' work (especially since he'll be doing other work in the neighborhood, so he'll already be nearby and can just swing by and make sure the subcontractors are there, for example).
posted by slidell at 11:56 PM on January 26, 2010


Some costs have to be paid, but don't increase with the addition of a new user. Example: If a university lecturer runs a 1-semester course for 20 students, and he gets paid $20,000 for doing it, and each student gets $10 worth of photocopied paperwork, then the cost per student is $1,010. But if an additional student turns up, assuming there's space in the lecture theatre, the only change is one more photocopy, so the costs only increase by $10. So if that lecturer had a friend who wanted a favour, they could let them attend and only charge them $10.

I picked that example because it clearly illustrates my point; for construction, the 'photocopies' (variable costs) would be raw material and contractors' time (costing much more than £10) and the 'lecturer' (fixed costs) would be admin work, advertising, insurance, and things like that (costing much less than 99% of the total cost).
posted by Mike1024 at 12:41 AM on January 27, 2010


Some further skepticism:

- The low amount is "favor" pricing. Since I'm a friend on a limited budget, he could get the subcontractors to do it much closer to their own cost for materials and labor, including their own time, but without much of an additional profit margin.

Depending on how good a friend he is, it might be plausible that he'll waive part of his own typical fees. That he can get subcontractors, who don't know or care about you personally, to do so is unlikely. As others have suggested, cut-rate pricing will put you at the bottom of every totem pole. Yours will be the project of last resort. Quality will suffer and your project will drag on forever, the delays and corrections ultimately costing you more money.

- The retail prices are higher because contractors have to price in other costs of doing business (like the time they spend finding a new job).


And that would be different for your job... how, exactly?

- Some building contractors inflate prices a bit because they don't want to lose money if the client skips town right after they buy the materials, so the up-front payment has to be a certain amount.


I don't follow this reasoning. You're going to get a discount for paying a materials deposit? I'd think a materials deposit or equivalent up-front payment would be standard procedure, not some special deal for you. Also, paying too much up front wrecks the balance of incentives -- they already have your money, so why bother actually doing the work?

- There are contractors out there right now who just want to keep their crew busy. They know they aren't going to be making any money now, but they want to keep their trusted guys from looking elsewhere for work.


This may very well be true, but all three contractors face the same basic market conditions. This idea -- that it's a buyers' market -- explains why everyone's prices would be lower now, but doesn't address why one contractor would be cheaper than another.

- There's a lot of double-counting in typical fast estimates. If you ask someone for a price for a kitchen, they assume you'll have to do some plumbing, electrical, and tile. But my budget already has plumbing, electrical, drywall, and flooring in other line items.


So these other contractors, who each presumably looked at the job as a whole and knew you were getting other estimates, aren't smart enough to adjust for this?

- Looking at the RS Means book, it does sound like there are a lot of markups. If I'm reading it right, it sounds like the subcontractors take a 10% markup on materials (even after including the cost of delivery and unloading), and a 10-20% markup on labor (even after including Workmans Comp Insurance and other overhead into all the hourly costs), and then 10% profit separate from all of that (even after including their top guys' hourly wages in the labor costs), and then the contractor adds 10-20% profit on top of that. So, he would give me the subs work at the price they charge him, and he would help me avoid the materials markup using his accounts at different suppliers.

I think you need to remember that 'markup' is not synonymous with 'profit.' Like the variety of taxes you pay -- sales, property, income, etc. -- the markups pay for something, even when what they pay for is not obvious or transparent. Avoiding markups means you avoid paying for something. Not paying for it means you probably won't get it. Exactly what you won't get, and whether you'll mind not getting it, is hard to pin down, but I wouldn't shrug off every markup as if it were some frivolous extraneity. Do you suppose that all these parties will simply lower their standards of living for your benefit? They won't, if they can possibly help it.

If you take the smaller loan and it turns out to be insufficient, then you're screwed. Don't set yourself up for that. Regardless of which contractor you decide to work with, be sure you have enough money to finish the job when (not if) it goes worse than you hoped. Rather than relying on your friend's assurances, think about the incentives you'd be putting into play by hiring him. If his grand plan depends on him making less money, and the subs making less money, and the lumberyard making less money than they would by working with other customers, then his plan sets up a situation where he and his subs and the lumberyard will all prefer to work for customers other than you. Protect yourself accordingly.

he'd take less for his efforts to check in on others' work (especially since he'll be doing other work in the neighborhood, so he'll already be nearby and can just swing by and make sure the subcontractors are there, for example).

With this, you're no longer talking about him accepting lower pay for doing his part of the job (supervision). Instead, you're talking about him skipping part of his normal duties -- the part where he's actually there to supervise. So now we're imagining that unsupervised subs working at less than their customary wage will do good work, on time, because he's 'in the neighborhood?' What leverage is planning to use to make this happen?
posted by jon1270 at 6:17 AM on January 27, 2010


I always tell clients this: Risk costs money. Either allocate it to the Contractor, or keep it yourself, but someone will pay for the assumed risk. If you want the contractor to guarantee a maximum price, you'll either pay too much for what you want, or you'll get much less work.

There's a long list of things that go into a contractor's overhead. Even though it seems like most operate out of their trucks, they usually have to maintain an office/shop, pay a bookkeeper, purchase materials, etc. Even though you're paying for materials in the contract, a significant amount of time can pass between purchasing materials and completing the job, so carrying costs have to be factored in as well.

The upfront costs are called mobilization costs. They're generally for purchasing materials, ordering any special equipment, scheduling. I do utility construction and we see mobilization costs around 3%, but the typical contract is $10 million or so. I think you can probably count on 20% up front for materials.

Means is a good guide, but it's best for order of magnitude pricing. We're seeing project bid 20-50% lower than the engineer's estimate, but I don't think residential construction is as elastic as heavy construction.
posted by electroboy at 6:25 AM on January 27, 2010


Also, "I'll use my personal discount so you pay what I pay" is a bullshit line that a lot of Contractors trot out. If you're skeptical, call the building supply place and get a quote.

One contractor, a friend of a friend, came up with a construction budget that is around half of everyone else's.* My question is whether I can really rely on those numbers.

Probably not. Get references, ask people about his work ethic, ask to see the work and if they're happy with it.
posted by electroboy at 6:28 AM on January 27, 2010


I don't care if the state website says he's up to date. Ask to look at them. Those websites are often wildly out of date and/or don't quickly update w/ people who lose certifications, etc. Also, that's his lifeblood. If he can't be bothered to keep it safe (the licenses, etc), then it says something about his work.

Also, right now there is a lot of cheap construction work to be had because the construction market is SHOT. 5 years ago a ton of guys left union labor to go start their own companies because the pastures were green and there was work everywhere. Now they're pawning off tools and laying off employees just to pay their mortgages. I have personally worked with several companies who wouldn't normally bother with my pissant $1-$5k jobs, but now are snapping them up like candy because it's what they can get.

You're gonna sign a contract, and that contract is gonna outline the project at hand, the cost of the materials, and the estimated time to completion. He shouldn't be allowed to vastly change any plans, buy any materials, etc. without getting your approval and/or amending the contract.

He is also likely going to take some shortcuts b/c he thinks it's a lower-key job. Like...instead of ripping out the lathe in that section and then putting up the drywall, he's just going to cover up the lathe with furring strips and new drywall, sealing in whatever awfulness is behind the wall. (Not necessarily bad if he's scoped it or looked back there somehow, and/or if there's something like blow-in insulation in place.)

Other estimates might include a shitload more wood because they plan to replace framing and blocking, this guy plans to use what's there. I'm a fan of using what's there...when it's usable. Remember that dimensional lumber has changed dimensions over the last 80 years, so things don't necessarily fit together like they're supposed to, which is why lotsa guys ripout and build new.

I'm a big fan of materials lists as well, because the markup a lot of these guys charge is a little out of control. That's part of what you're entrusting to the contractor though, so it's kind of up to you.

Dude might be planning to do your project around other projects...in evenings, on weekends, whatever. It's also possible that some of the other companies either a) don't want your job (seriously, it happens. they bid as a courtesy) or b) you seem to them very unawares and it's an easy opportunity to take you for a ride. Remember that prevailing wage (which you're not gonna be paying, I'm just saying) for an unskilled laborer is almost $30/hour in most places, higher than that for carpenters and roofers. I'm sure this fella wants to see $20 or more an hour for his work (that's only $40k a year, after all, if he's working full time.), most contractors will, which is why labor is so expensive.

Lots of possibilities. Ask him.
posted by TomMelee at 6:33 AM on January 27, 2010 [2 favorites]


Response by poster: These were all great answers. Thank you! What happened ultimately is that I realized that the standard construction contract we had to sign as part of HUD's 203k loan program requires the contractor to promise to do things for a certain price. And if (s)he cannot, or if the contractor could not complete the job for some reason and I had to hire someone else, that contractor is liable for any difference between what they agreed to do the work for and what it costs to pay someone else to do. I sincerely hope it would never come to that, but it's nice to know that I'm legally protected, at least theoretically. (I note the "skip town" comments above, but well, I couldn't plan for that scenario.) Also, the construction budget requires a 15% contingency, so that's in place as well. Thank you again for all of this information, which helped a lot as I was figuring out what to do.
posted by slidell at 9:04 AM on April 12, 2010


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