So while spending some long days of waiting in doctors waiting rooms I decided to dig around and try and see exactly what this COPE stuff was so I listened to The Contracting Handbook: Michael Anschel of OA Design Build on the Cost of Project Execution (C.O.P.E.) method of estimating and then viewed the podcast “”The Myth Of The Markup” – Michael Anschel & Kyle Hunt” from back in February of 2022.
In the “The Myth Of The Markup” podcast around 7:00 in Michael and Kyle agree that if you are a single trade contractor like a roofer siding contractor plumber etc. you probably should have a single markup Across-the-Board and I felt the reasoning was logically and mathematically misguided and it was also totally ignorant of the actual history surrounding Markup in our industry.
It is ignorant historically in that according to my research the use of a Loaded Labor Rate goes at least as far back as the lead up to the Spanish American War. Contractors working on ship building and armaments used a Loaded Labor Rate (loaded with their Overhead and Profit) to estimate and bid projects because the raw materials were purchased and provided by the government.
And as far as the building and remodeling industries were concerned starting in the 1060s the use of a Loaded Labor Rates and Capacity Based Markup methodology (based on a company’s available or potential Yearly Billable Hours) has been rooted in the specialty trades while the Sales Volume Based Markup came from the General Remodeling and Remodeling Magazine (Hanley-Wood) promoting it so heavily for years.
—“…[In the 1960s] There weren’t cell phones or pagers. No Internet. You could change your own oil and the headlights in your car. No REMODELING magazine. No semblance of business groups or consultants focused on bringing professional business practices to the remodeling industry. No design/build. No “professional” handyman. No big-box stores. The remodeling industry was made up of craftspeople who loved the smell of sawdust…”—
In the midst of that mish-mash of the 60s and early 70s Walt Stoepplewerth looked at the industry and determined that only 5% of remodelers run their businesses; the other 95% let their businesses run them and looking at that 5% of successful remodelers he discovered that they were typically charging enough for their work product that they then generated Gross Profit Margins that were 34% to 42% of their total Sales Volume.
He then turned that equation around to say that if a remodelers knew what their Direct Job Costs (COGS) are to achieve the successful Gross Profit return level remodelers need to Markup their Direct Job Costs (COGS) a minimum of 50% (a 1.5 markup) to get to that minimal level or even better Markup their Direct Job Costs (COGS) by 67% (1.67) to achieve a better 40% Margin.
And if you did the same kinds of project over and over again with the roughly same ratio mix of Labor, Materials, and SubContractors for each project the math would work out and that Sales Volume Based Markup method worked okay and it was certainly better than no pricing methodology at all. But the problem is the ratio mix of Labor, Materials, and SubContractors isn’t always the same as when you first figured out what Sales Volume Based Markup figure to use.
That Sales Volume Based markup method became the Remodeling industry standard pricing model for work because with the first issue of Remodeling Magazine in 1985 Walt Stoepplewerth became a regular columnist working hard to professionalize and improve the industry this/his markup method was promoted over and over and over again. And then towards the tail end of his career Michael Stone picked up the mantle for the method with his book Markup & Profit: A Contractor’s Guide.
MEANWHILE in the paint, landscaping, plumbing, HVAC, and other specialty trades and subcontractor industry people like J.R Huston (OPPH), Irv Chasen (PROOF), Ellen Rohr, and Frank Blau were championing a different model for markup which we know more commonly call a Capacity Based (or Activity Based) Markup or OPPH (for Overhead and Profit Per Hour).
IN OTHER WORDS CAPACITY BASED (OR ACTIVITY BASED) MARKUP OR OPPH (FOR OVERHEAD AND PROFIT PER HOUR) OR PROOF ALL CAME OUT OF THE SINGLE TRADE PART OF THE INDUSTRY! (i.e. architectural woodworkers, electricians, plumbers and painters etc.)
A big huge logical reason for this was for special trades and subcontractors there were times when you didn’t provide the Materials and they were instead provided by the General Contractors , Architects, or Interior Designers and the trades rarely used subcontractors to generate their work product so they needed a more robust Markup Methodology to consistently cover their Overhead (Cost of Doing Business) Costs.
In fact back in the 1980s through to the early 2000s Irv Chasen’s Markup manual How to Survive and Prosper in the Contracting Markup was the official manual of The ASA, The American SubContractors Association.
Another reason was a single trade (i.e. specialist) contractor I can then offer Good, Better, and Premium options for lets say a Front Entryway Installation. The Labor Cost and the resulting Price the contractor stays the same no matter which level of Entryway the Client ends up selecting. The can select the Good (Economy) Entryway at $2600 or the Better Entryway at $3900 or the Deluxe Premium Entryway at $7500 the Labor Cost and the resulting Labor Price the contractor charges stays the same.
And then I also agree with the viewer (Paul McManus) that posted you two should stop using the word “myth” (13:00) as it’s intended effect is pejorative. As I find it especially obnoxious in respect to the word Markup because Markup is with us no matter what we think or do. In order to sell any product and still cover your overhead costs you have to MARKUP or raise any price higher than your raw costs. PERIOD. The question is what are you marking up and for what reason.
For example if I have a raw labor cost for a Carpenter (her basic hourly wage) that is $22.00 I have to apply a Markup of 1.19 to come up with a Burdened Labor Rate of $26.18 that reflects the bare basic contributed costs of FICA & Medicare, Unemployment, and Workers Comp.
I have been using a Capacity Based Markup since 1986 (although I first learned of the method that was branded as PROOF) and over the years my company has performed as a Specialty Trade Contractor, worked as a Subcontractor, worked as a Custom General Contractor. We have built specialized interiors for night clubs and restaurants, trade show exhibits, and scenery for film and TV along with high end residential building and remodeling. We built “projects”. And our Markup pricing methodology for all of those things was the Capacity/Activity Based Markup method.
I’ve quoted the late Irv Chasen a lot where he wrote in his JLC article article Allocating Overhead to Labor Makes Financial Sense:
—“Builders often allocate overhead by adding a percentage to labor and material combined. This may work well for some companies, particularly when the labor-to-material mix remains about the same on most of their jobs. However, more often than not, this will not hold true. Typically, relating overhead to labor and material combined can produce mixed results, while recovering overhead as a percentage of labor alone is far more accurate.”—
The Capacity/Activity Based Markup method provides more constantly ACCURATE pricing than a Sales Volume Based markup and your choice on which method to use should be based on that criteria not some bullshit about being Single Trade Contractor vs. a Custom Remodeler.
In fact over the years when I have conducted surveys regarding What Markup Pricing Methodology Do You Use the split has typically come up around 40% use Estimated Sales Volume Based Markup (Walt Stoepplewerth/Michael Stone) and 40% use a Capacity/Activity Based Markup method and another 20% use Some Other Method (which usually means no consistently logically method at all).
That said while I have never done it if I restricted the base set of the contractors I was polling to Specialty and Single Trade Contractors like architectural woodworkers, electricians, plumbers and painters etc. I’ll bet that 80% of them use a Capacity/Activity Based Markup method.