Commission and/or referral fees

So recently I met a general contractor who specializes in high-end remodel work. Geographically, he works outside of the area I've historically worked in, but with the economy the way it is, we'll travel a little further to keep working. Anyway, if we bid a roof for the general contractor, I presume they charge the property owners some kind of fee (a percentage). This GC prefers that we just contract directly with the property owners but did ask me to include a referral fee in the job of $500 for him.

Generally I bid jobs by estimating my labor cost (including taxes and worker compensation insurance), estimate my material cost including sales tax, add in my miscellaneous expenses (i.e.: permits, dumpster fees, delivery costs, commission and/or referral fees) then sub-total it. Add 25% overhead and sub-total again. Then add 30% profit for my final price.

I guess my question is, do you add overhead and profit to commission and/or referral fees?

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wywoody - Regarding the skylight job; upon inspection of the roof, there were in fact 5 incorrectly flashed skylights. Because the roof was a standing seam metal roof, 1/2 the roof needed to be replaced. The total repair cost was around $8K. It's not like the guy wanted $500 on a $250 repair. >>>

The guy is avoiding paying liability insurance by getting a referal fee instead of acting as the general and subbing. At a certain price point, a $500 referral might make sense. But to expect his customer to have to pay $500 (indirectly) to him because he gave them your name to fix a leaky skylight? That's moving into A hole territory. In this economy, a GC should be giving referrals to his subs to help keep them around for him to use when he needs them next.>>>

Jed Said: 25% overhead and then 30% profit? 55% plus, over cost? If we did that we would not be competitive at all. .........scratchin my head now....

So the final tally is actually 62% over cost. There's no way......not here..>>>

Jeff, if I understand your approach, the numbers would be as follows: Direct cost: $1000 (arbitrary number) Overhead is 25% of direct cost, or $250. Subtotal gives $1250. Profit is 30% of subtotal, or $375. Total is then $1,625.

We calculate everything as a percentage of revenue. So the above example, will have: Direct costs: $1000 (62% of total of $1,625) Overhead: $250 (15% of total of $1,625) Profit: $375 (23% of total of $1,625).

If you meant the percentages to be based on the total, then the numbers would of course be different. As Jed points out, 25% plus 30% gives you 55%. That means that directs are 45% of the final price. In which case, the final price would be $2,222. That's amost $600 higher than the first number. So I am really not clear on how you calculate the final number.

In our situation, our direct costs (Material + Labour) are reasonably consistent from job to job, so we apply commission, overhead and profit as percentages of the revenue number. This approach also allows me to check quickly what our break-even and target revenue numbers should be each month.

To answer your question, I would consider the referral fees as a commission component.>>>

Jed,

That is about where I am with my jobs. Don't win them all but we have been working steady. A bit slow at times however the weather helps out at times to. These numbers will help you stay in business with a good model and store up enough for the winter months.

Just my opinion, but it has worked for me.

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25% overhead and then 30% profit? 55% plus, over cost? If we did that we would not be competitive at all. .........scratchin' my head now....>>>

jcroofs - Thanks for your input. Here's a little bit more information. The particular GC is a one man show and I know he owns the company because his name is the name of the company. Those points are kind of moot. The reason the roof wasn't included in the last job was because the GC was hired to replace the dock behind the house. Most of the way through the dock job the homeowner mentioned to the GC that his roof was leaking and asked if he could recommend someone. He called me and gave me the lead. The property owner will likely go with whomever the GC recommends.

On another project, the GC was remodeling a bathroom and noticed that the skylight leaked. He was done with his project and asked me to stop by and give the homeowner a price and add in $500 for him. I don't think there is anything underhanded or improper in the way he has engaged me.

What I'm trying to find out is weather the average roofing contractor adds overhead and profit to referral fees and/or sales commissions. I gather from your post that you don't. Thank you for your input.>>>

First is the GC going to put the referral fee in his pocket or the company's pocket? Does he own the business? If so then referral fees are fine. But and this is a big but if he does not own the business himself what are his company policies. Just for assuming that he does not own the business, you need to go to the business and find out about there company policies. Get an invoice from this person for the referral fee, but you need to call it a commission for tax purposes, and for yourself be able to write it off. But for your main question bid the job as you usually would then add the fee, do not calculate profit and overhead off with commission in quote, because that few dollars could get you the job. And you should contract not through the homeowner but through the GC if he is legit, because I can assure you he has but a roofing price in his quote.>>>