How General Contractors Make Money

General contractors are individuals or entities that provide construction services to clients. Their job is to oversee and manage the whole construction process in a project, from planning and design to construction and final inspection. But how do general contractors make money? In this article, we’ll explore the different ways general contractors earn a living in the construction industry.

Project-Based Fees

The most common way that general contractors make money is through project-based fees. They charge a fixed amount for the whole project or a percentage of the total cost of the construction. This fee may include the cost of materials, labor, subcontracts, permits, insurance, and other necessary expenses. The amount of the fee depends on the complexity and size of the project, the location, and the level of expertise required. General contractors may charge more for high-end or unique projects that require specialized skills and equipment.

Markup on Subcontracts and Materials

General contractors may also earn money by marking up the cost of subcontracts and materials. When they subcontract some part of the construction to a specialized contractor, they may add a markup fee on top of the subcontractor’s fee. This markup fee may range from 10% to 30% of the subcontractor’s fee, depending on the amount of work and supervision required. Similarly, general contractors may add a markup fee on the cost of materials they purchase for the project. The markup fee may vary depending on the type and quantity of materials and the supplier’s location.

Change Orders

Change orders are additional work or changes to the original project scope that the client or the general contractor requests. Change orders may happen due to unforeseen circumstances, client preferences, or design changes. General contractors may earn money from change orders by charging an additional fee for the extra work or changes. This fee may be based on an hourly rate, a fixed fee, or a percentage of the added cost.

Referral Fees

General contractors may also earn money by referring clients to other professionals in the construction industry. For example, they may refer clients to architects, engineers, or interior designers who can help with the project planning and design. In return, these professionals may pay a referral fee to the general contractor. This referral fee may be a fixed amount or a percentage of the fee the referred professional earns from the client.

Conclusion

General contractors can earn money in various ways in the construction industry. They may charge project-based fees, mark up the cost of subcontracts and materials, earn from change orders, or receive referral fees from other professionals. However, the key to being successful in the construction industry is to provide excellent service and manage projects efficiently while maintaining profitability.