Contractor Profit and Overhead

Topic: 
Contractors and Construction Contracts
Question: 

Is it customary for a contractor to add a 10% overhead and 10% profit on work that he did not do? The electrical work was done by someone else who came on the job before we had decided on a contractor. The carpet was chosen by me at a nearby carpet store. Now, our contractor and our insurance adjuster are deadlocked. The adjuster says he won't pay those extra charges and the contractor says he won't do another days work until he does. Please help!

Answer: 

First of all, let's start with the basics. The general contractor's main job is to manage and coordinate the work. Some general contractors "don't do any work at all" i.e.,. they don't pound nails etc., but they are outstanding organizers, managers and supervisors. Their job is not easy, and good contractors are worth a lot of money.

NOW I WILL TELL YOU AN INDUSTRY SECRET! A remodeling contractor would go broke on a 10/10 job unless he/she also makes some money on other aspects of the work. Smaller jobs require higher overhead and profit rates. 10/10 may be fine on a freeway overpass, it's the road to chapter 11 for the remodeling contractor. 10/10 IS A FICTION! The rest of the profit, overhead and CONTINGENCY is (and has to be) hidden in other costs. Why do we have this fiction? Because "common wisdom" tells us that "we only want to pay for the actual material and work performed on the job".

So the game goes like this: The contractor knows from experience that the real profit, overhead and contingency costs must be hidden in the costs of the job. An "honest" cost breakdown is sure to be rejected by most customers.

But let's take a look at your case. What does the contract specify? Did the contractor schedule, organize, supervise and manage the entire job? Was all of the electrical work completed before the contractor came on site? You chose the carpet (I would hope so, that's your job) but did the contractor schedule the carpet installation?

My guess is that the contract was not very specific (the contractor's fault - I see that all the time). I would also guess that the contractor did organ