How Do General Contractors Make Money
General contractors are an essential component of the construction industry, responsible for overseeing and managing construction projects from start to finish. But how exactly do they make money? In this article, we’ll break down the various ways that general contractors earn their keep.
1. Markup on materials and labor costs
One of the most common ways that general contractors make money is through a markup on the cost of materials and labor. This markup can vary, but is typically around 10-20% of the total cost of the project. This markup covers the contractor’s overhead costs, such as insurance, equipment, and office expenses.
2. Fixed fee or percentage-based pricing
Some general contractors opt to charge a fixed fee or percentage-based pricing for their services. This can be a flat fee for smaller projects or a percentage of the total cost for larger ones. This pricing model can be beneficial for clients who want to know the total cost upfront and for contractors who want to take on larger, more complex projects.
3. Subcontractor fees
General contractors often hire subcontractors to complete specific portions of a project, such as electrical or plumbing work. The general contractor then charges the client for the subcontractor’s services, often with a markup. This allows the general contractor to focus on managing the project while delegating specialized tasks to experts in their respective fields.
4. Change orders
Change orders occur when there is a change to the original project scope or plan. These changes can occur for a variety of reasons, such as discovering an unexpected issue during the construction process or a client’s request for additional work. Change orders can be a significant source of income for general contractors, as they often charge additional fees for the changes.
5. Referrals and repeat business
A satisfied client is more likely to refer a general contractor to others and to hire them again for future projects. Building a reputation for quality work and exceptional customer service can lead to a steady stream of referrals and repeat business, which can be a valuable source of income for general contractors.
In conclusion, general contractors can make money through a variety of methods, including markups on materials and labor costs, fixed fees or percentage-based pricing, subcontractor fees, change orders, and referrals and repeat business. By leveraging their expertise in project management, construction knowledge, and customer service, general contractors can thrive in the competitive construction industry.