Posted By Joe Black on 30 Dec 2008 10:39 PM
...it appears to me that a general contractor was having subcontractors submit written bids that were 20% higher than the actual subcontractor's price. (As an example, the general contractor was paying $100 to a sub, but turning in that sub's bid as $120). So the general contractor was making the initial 20% markup on the sub bid, plus another 20% for O&P.
The question being, is that unethical, or just a way for the contractor to make the profit he needs to stay in business?
I have seen that happen on a number of claims I have worked.
Visualize that you are a consumer, calling a cabinet subcontractor out of the phone book. Prior to the recent real estate & economy slump, people with a yellow page add would get random phone calls, and maybe sell 1 out of 10 inquiries.
Now imagine that the cabinet guy, or flooring vendor, painter, etc. gets work fairly often from a water-fire damage restoration General Contractor, or new home builder. There is sort of a "wholesale" arrangement that goes along with volume of work and not getting jerked off by 1,000 questions from the consumer.
I remember a fire claim years ago where the General Contractor was saying his subcontractor bids were coming in so much higher (the GC and I were both using Xactimate). I asked to see the sub bids, and he almost turned white. I knew the guy for many years, so he confided how this system worked. And your right, they do need to make more than 20%. But he, and many other people that are GC's have their own crew that does much of the work, even if it is just "pack out" and cleaning. Some of them worked up the trades as a framer, whatever, but they all sub out the flooring, counter tops, etc. MOST of the GC's don't sub out 100% of the work and live only on the O&P marked up on the sub's work. I have seen some operate that way, but you don't want to get tunnel-visioned into thinking that a GC works simply for O&P. Sometimes they do.
In some ways, it doesn't matter that much to me how something is "gift wrapped" when I look at a contractor's price. I have seen many, many estimates from a General Contractor with no mention of O&P, yet the bottom line price on their single page bid would come amazingly close to my 25 page granular detail estimate with 10 & 10 added for O&P at the end of my estimate for insurance purposes. The contractor O&P is part of his bid but doesn't HAVE to be separated out. It's one of the the things they take into account, along with materials and labor costs.
I just look at the damage, and with some years of experience and the guidance of updated unit costs as somewhat of a guide, determine if the contractor's price is OK once all the details of the scope are allowed for (or cut back, if they are upgrading - remodeling - overkilling)