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Over the years, many scholarly articles have been written about construction management fees. This article comes at it from a different perspective–a practical approach.
But let’s not miss the important lesson here: Don’t worry about the size of the markups.
There’s a reason for it. The fact is, there really isn’t much new in 2024 concerning construction management fees, just as there isn’t much new on construction project profit markups and margins. This whole topic can be boiled down to just a very few facts to remember, some concepts to ponder, and some points to never forget. In other words, let’s get practical!
Historically, construction management fees, as well as general contractor fees, and even subcontractor markups and fees have always ranged between about 5% and 15%. A subcontractor bidding on an average job will likely figure to markup his costs about 15%. However, if the job is a bit bigger, he might drop his profit markup. Likewise, if it’s smaller, he’ll probably have to increase the percentage of markup.
Surprisingly, general contractors work much the same and, what do you know? Construction managers approach business in a similar way. But…wait! That can’t be right, can it? I mean, if you add 15% plus 15% plus 15% you get 45%, and we all know that construction is not that lucrative! Let’s make sense of it.
Protip: Learn more about how much you can charge as a general contractor.
The fact is that the percentages are real, and they do range between five and fifteen percent. Those are solid numbers. However, it is rare when a job permits those three classes of contractors or managers to stack maximum profit markups on top of one another. So that is where things get a little fuzzy. Here’s how it works.
While many subcontractors routinely work on a profit markup of about 15%, if the job is a small one and the sub is working directly for the homeowner, the sub will be ‘the contractor face’ of the job, the project’s de facto manager. As such, his/her markup may be a little more than their usual average. But let’s change the project scenario from a small homeowner job to a little bigger one, like the entire building of a typical custom home.
Let’s say it’s a really nice home and, for the sake of simplicity, the project budget is one million dollars. In this case, there is often a general contractor overseeing the job. Here, the sub would likely have bid to the GC, and at his competitive market rate. The GC will have a markup of five to 10 percent on the work of his subs. But if his own company does some of the trades work, like the framing or foundation, for example, the GC very well may figure a 15% markup on that portion of the work, plus some kind of a management fee on top.
Let’s change the project once more to a very large residential job, perhaps one of the so-called, “McMansion” variety, maybe running into the tens of millions of dollars. In this scenario, the owner of the project might desire an overall construction manager to guide that process, which might take a year or two to complete. The CM might ask two or three or four GCs to bid for the work. Each GC would put together his/her own team of subs and suppliers, all of whom would bid competitively at market rates, and likely use markups of 10 to 15%. The GC would also include a markup on costs of 5 to 10%, for the management work, and also the costs of his own field construction efforts, if any, and those would carry their own ‘subcontractor-level’ markups in the 15% range.
But what about the CM? The CM in this case might select the best package from the invited GCs and their subs, and then markup those costs 5% or so. Confusing? Not really. Each level of contractor or manager used the appropriate markups. But let’s not miss the important lesson here: Don’t worry about the size of the markups. They are pretty well established and they have stood the test of time. The more important factors here are these two: A. your subs and suppliers have to be top-notch and dependable; B. you absolutely need to know your costs.
Let’s take a look at the math of the million-dollar home. If the GC completes it on time and on budget, his project may realize a profit for his company of $150,000.00. Not bad at all. But…and it’s a big but…the $150,000.00 exists only if everything goes according to plan. Put another way, $850,000.00 worth of work has to happen exactly as intended in order for our GC to save his $150,000.00. Think of this as ‘negative leverage’ if there is such a term. But you see the problem, don’t you? If this was a card game you might say that the deck is stacked against you.
So basically the lesson here, again, is don’t miss the big picture. Relatively speaking, the CM or GC management markup percentage is not the critical part of the job. Knowing your hard costs and the abilities of your team is where it’s at. This is one of the reasons you have to pay attention to the progress of the job, and develop the ‘head on a swivel’ skill necessary to see everything. Safeguard against doing any free (out of scope) work. In most cases, don’t be so willing to ‘do a favor’ that goes unpaid, unless you know where it’s going to lead. Sounds mercenary, doesn't it? Unfortunately, it can be a tactic for survival.
In the same way, you know the project on your job site, you also know your contract documents, including plans, schedule, and specifications. If something isn’t right, or not in accordance with plans, then bring it to the attention of your project’s hierarchy. If you or your team make a mistake that must be corrected, understand that the cost of a correction is said to be three times the cost of the original task. That’s a rule of thumb in the construction industry because you lose time, you lose the cost of demolition and disposal, you are liable for re-inspection charges and you also pay for the re-work. That eats profit!
In the end, it’s all about the beginning! Choosing the right team. Knowing your costs. Planning ahead. Whether you are a subcontractor, general contractor, or a construction manager, you have to know your stuff and stay on top of it. Never back away from whatever markups you use. Be proud of your abilities. You work hard, deliver a quality product, and your price is competitive. Your client is lucky to have you. Don’t sweat the small details–the size of markups will take care of themselves. They always have and they always will. Well manage the big parts (the budget) of your project and the management fees will take care of themselves. Said another way: “Stay Practical”.
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