Volume 38, Issue 5, May 2003

DearUSG
The 15-Percent Solution
Dear USG,
The subject matter in Dez Farnady’s column in the February 2003 issue (see page 10) is right on and it is apparent that he has an appreciation for the problem, but for reasons I do not understand, he failed to detail the real problem.

Whether a subcontractor marks his jobs up 15 percent or 50 percent is his own business and that is as it should be.

The real problem is that many of the owners and general contractors include in their contracts a limitation that extra work and change orders can only be marked up 15 percent and in most cases only 10 percent. Out of that they will hold 10 percent retention. I certainly understand the owner’s problem, he knows there are going to be change orders, and with no restrictions it could be a license to steal. But, 10-percent or 15-percent markup is not fair.

I do not know what the average cost of doing business as a glass and glazing contractor in the country is, but I do know what it costs to run my company, and that is approximately 15 percent of sales. To cover that requires a markup of 17.65 percent to job cost. Any desired profit must be added to that.

Without complex mathematics, $10,000 in cost marked up 10 percent with a 10-percent retention puts only $9,900 into the cash flow. The poor sub that agrees to this markup has to finance the change order $100 out of his own pocket and will make no profit.

People in our business with whom I have discussed this problem often do not understand the difference between a cost markup percentage and the profit percentage based on sales. Most say they just fake the costs and put in whatever it takes to make what they want. This is certainly one way to solve the problem, but …

We were involved recently in a major lawsuit with an owner and general contractor and the 15-percent markup clause was a part of the contract. Although change orders and the markup are not a part of the suit, the owners’ lawyers have demanded an audit of our books to establish the continuity of orders and deliveries. Change orders were a part of the project, and certainly during the audit costs could become apparent. Our lawyers point out that if they find anything improper it could amount to fraud and definitely affect our case.

We need to educate glass contractors and encourage them to refuse to accept contract agreements that force them to lose money or commit fraud. This could be something that would be a great benefit to our industry.


Charles H. Boniols
Chief Executive Officer
Model Glass Co.
Anaheim Hills, Calif 


USG

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