Topic

    jessedphillips
    Subcontractor Mark Ups
    Topic posted October 27, 2009 by jessedphillipsElite Contributor, last edited January 19, 2012 
    6949 Views, 11 Comments
    Title:
    Subcontractor Mark Ups
    Content:

    My company is in the midst of performing a waste removal job (an unregulated dump) for a client.  Our scope of services includes subcontracting the actual digging, loading, transporting, and disposal services.  Our direct services include monitoring the removal, completing required RCRA paperwork, testing, reporting, etc. 

    We typically mark up our subcontractors' fees, meaning our client gets charged for our time and materials, as well as our subcontractors' fees, plus a mark up of those fees.  Our client is trying to say that doing this is "double dipping" because now the consultant (us) is acting as the general contactor. 

    Our client says that we should have explicitly stated in our engagement, proposal, agreement documents that we intended to charge a mark up for these services.

    So my question is: isn't this general practice?  Does our client have a valid beef?

    Comment

     

    • R Scott Powell

      In my proposals for such work I document two options for the client:

      1. They can arrange for an appropriate contractor to do the digging and hauling, as long as the contractor can provide the appropriate H&S training documentation, and insurance coverage for my review. 

      or

      2.  I will arrange for an appropriate subcontractor.  There will be a 10 to 20 % markup for this (good regular clients get 10, first time or risky clients get 20).  When asked why:  Time to research appropriate subcontractor (yes I have couple preferences in my back pocket, but I always make sure they send me their most updated insurance certificate for each new job); Scheduling and managing the subcontractor; and most importantly Subcontracting risk (when you obtain the subcontractor, they become your "subcontractor" and you will be first in line if an accident or issue occurs).

      Those were just the quick issues and reasons for charging a mark-up.  So to answer your question... you should have some kind of commentary in the proposal documenting your potential charges for subcontractor acquisition.  If you do not, then I would not be surprised if the client is taken aback a little on a surprise charge that can be significant if the work is substantial. 

      If this is a large excavation project spanning weeks to months, with significant subcontractors fees, I would suggest a client hire the contractor directly and I'll supervise the work, or I"ll charge a flat fee for setting up the subcontractor under the client. 

      Scott

    • McCarthy

      Agree w/ Scott but would add that the "cost of capital" can be a primary reason as well.  Depending on the size of your business and your accounts payable relationship with a given customer, sitting on large contractor invoices ties up capital (assuming you pay your providers when invoiced).  Sometimes the payment delays are passed on to the contractor (w/in reason: 45 - 60 days), but they don't want to wait for payment either. 

      P.S. Scott's range for mark-up is typical, although government and large-scale projects often range from as little as 4.5 - 6.5 percent (but thats pure mark-up).  You may also find that you're competing with consulting companies that also have their own contracting equipment, geo-probes, excavators, etc. 

    • jessedphillips

      Thanks for the responses.  I guess my lesson here is to make sure the client is clear on the relationship and any mark ups.  The client thought that we would charge for only time, so I suspect we may spell out that there will be a 10% markup (or 15 or 20 depending on the circumstances) on subcontracted services in the future.  They also said they'd never encountered a situation where there is some overlap in the "traditional" roles of contractor (an entity which "does") versus consultant (an entity which "advises"). 

      It seems that, being in the industry and this being basically standard practice, we sometimes have our "blinders" on when it comes to uninitiated clients. 

      Thanks again!

    • monkfish

      I have asked my consultants on several occassions to reduce or eliminate mark-up on significant subcontracting invoices and in return I pay them immediatley.  They don't have to float the subcontracted cost, I reduce the overall project expense.  Consider offering this under the right circumstances to your clients.......it is a great way to improve the client/consultant relationship.

    • seand

      I suppose it would be double dipping if you were getting a 10% GC fee, but that does not appear to be the case here. Even insurance companies recognize the purpose/validity of marking up subs (cost of capital and risk being formost). Your client gets you in the "liability chain" if your subs do not perform and are contracted to you (they must pay for this right). If they contract directly, they have less of a path to you as the GC (they may save on markup, but not if there is a costly error).

    • MaxEng

      Since this is a "business issues" forum, I have to say that the initial post comment that "we typically charge 10%" bothers me.  "Typical" means nothing here in my opinion.  What does your contract language say?  It should be explicit as to what markup you will charge on subcontractors, outside expenses, etc.  If the client has agreed to contract language that specifies a 10% markup, is he now trying to change the rules at the end of the first quarter?

    • jessedphillips

      Our contract language references the proposal that is presented as lump sum and provides a breakdown of costs.  The presented breakdown of costs includes any mark-up. For example, we'll note the service and the cost to our client.  That cost doesn't show the cost to us. 

      Our client was pressuring us after the scope of work creeped because of conditions that were not anticipated onsite.  Our client was very "hands on" during the pricing of scope-creep work and was high pressure regarding keeping costs down.  When they found that our original costs included a mark up, they acted surprised. 

      So while we didn't explicitly state a markup, we implicitly included it.  Lesson learned I guess; I didn't think anyone would be surprised that a subcontracted service would be marked up.  And I should say that we "typically" charge 10 -20 percent. 

      Our client agreed to costs and then wanted to say that we came to those costs in a surprising way.  They don't really have any problem with the costs, they just claim that they didn't expect any mark up.

    • Tom Speight

      This is always a dilemma for us.... we usually give people a list of contractors we recommend and suggest they pay the contractor directly.  That costs us the markup fee (carrying cost) but saves us the worry of saves us the worry of having to pay the subs when we haven't been paid yet ourselves.

      On the flip side, there are times when the client picks a contractor we absolutely DREAD working with, just because they were the absolute lowest price. Case in point.

      On the other flip side, there are times when the client pays us, doesn't pay the contractors, and still wants us to file the completion report.

      On the other other flip side, "I'm paying you, so you do what I say" resonates better for chain-of-command purposes than "This guy is paying you because I told him to, so you do what I say."

    • rmathews

      A markup does not equate to profit. As noted by others, the markup covers insurance (a contractor's work is covered by your E&O, commercial, etc.), taxes (B&O at a few percentage points depending on the location), TERO, and hopefully covers the time of the accounting department in processing and paying invoices. A client who doesn't recognize the costs associated with a subcontractor costs should pay the subcontractor directly and keep my insurance and B&O taxes out of it.  

      Contractually tying a non-sub excavation contractor to the consultant can be difficult if all parties don't want to play together.

      Our contract specifies a standard markup on all subcontractor costs (labs, locates, contractors, materials, etc.) and rises a few percentage points when conditions of insurance (project specific), TERO, or similar are present.  

       

       

    • FStephenMasek

      Probably 40% of our work since the company started in late 1991 has been as a subconsultant.  We consider such clients as a kind of additional sales force, and good sales people deserve good pay.  In many cases, we are specialists in areas where our consulting company client has little or no expertise, or where they would use junior staff when we used senior people, so the ultimate client certainly benefited.  

    • BModi

      Markup on subcontractor charges is a standard practice in our industry, especially in Michigan region.  Our standard markup is 15% which is negotiable on larger projects.  The markup covers overhead expenses, insurance costs, billing costs and creating vendor agreements.  The key issue is that we as consultants are taking on a risk and if something goes wrong we will be the first one on the line of strike.  The markup is our reward for taking on this risk.  We also give an option to the client if they want to retain the contractor and save the markup.  Not too many clients want to handle contractor issues and when offered this option, most of them turn around and understand why we charge a markup.