Contractors seem expensive because a bid covers far more than labor: licensed subcontractors, materials and their markup, insurance, permits, overhead, and the risk of fixed-price work. A good contractor’s price reflects doing the job right, on schedule, and standing behind it, which is usually cheaper than hiring the lowest bidder and fixing problems later. Here’s where your money actually goes.
Anyone who’s ever renovated their home has probably asked themselves the same question “Why are contractors so expensive”? Someone who hopes to renovate can often be shocked by a contractor’s pricing if they haven’t done adequate research about the true costs of renovations in today’s market.
Some contractors are more expensive than others, but certainly hiring a contractor is not going to be cheap. There are multiple reasons why contractors are so expensive, so let’s look at the major reasons below:
Here at GreatBuildz, a free service that connects homeowners in the Bay Area, Los Angeles, Orange, San Diego and Ventura Counties with reliable contractors, we speak to homeowners every day about finding reliable contractors that are reasonably priced – read on to learn more.
Why are Contractors so Expensive? – Labor Costs
Skilled labor is one of the largest expenses in construction. Contractors need to hire experienced, qualified workers who expect fair wages. These labor costs can significantly drive up the overall cost of a project, especially in high-demand markets.
The two major costs a contractor incurs in running their business are 1) materials and 2) labor. I’ll discuss materials later, but with regard to labor costs those have consistently been going up over time. Especially now, in an environment where skilled trades are in short supply, the cost to find and hire these skilled workers has never been higher.
For a contractor to find and retain quality skilled workers, they must pay top dollar in salaries and bonuses. If a contractor wants the final results of a project to be of high quality, they must use very skilled workers and labor, which of course, costs more than unskilled labor or someone who might perform poor quality job.
It’s not hard to notice that contractors are more expensive in the higher-cost areas of the country. This makes sense because they have to pay their workers more in these areas as the cost of living is quite a bit more expensive. So if you live in a higher-cost or more expensive area, it should be no surprise that contractors are indeed more expensive in your region.
Why are Contractors so Expensive? – Insurance and Licensing
Insurance for contractors is almost always quite expensive. Especially Workers Compensation coverage. Contractors must have insurance that protects their business from an injury sustained by one of their workers; this is called Workers Compensation insurance. In many situations, this insurance is extremely expensive, especially for workers that have dangerous trade specialties such as framers, roofers, and electricians. It is less expensive for less dangerous trades such as painters and flooring installers.
Contractors also generally maintain liability insurance and automobile coverage for their staff, and all these costs add up to a significant amount they must expend just to be in business. With all Contractors must have these insurance coverages so that their clients do not have potential liability for the work and remodeling being done at their homes. Contractors that provide a price estimate that seems too low or too good to be true could be working without proper insurance coverage.
Why are Contractors So Expensive? – Material Costs and Fluctuations
Construction materials have seen dramatic price increases due to supply chain issues, tariffs, and shortages. The costs of lumber and other essential materials can fluctuate and impact the final project price.
On every project they take on, contractors use many different materials to complete that project; materials such as lumber, drywall, copper, rebar concrete, etc. A contractor has absolutely no control over the changes in price of these many materials over time. If the cost of concrete, for example, goes up 20% from last month, the contractor still has no choice but to purchase that more expensive concrete for your project.
In addition, a contractor could be subject to significant price swings of materials over the lifetime of a project. For example, a budget they give to a client on a project that starts today may not require the purchase of drywall until three months from now at which time that material could cost substantially more. A good contractor might pad their budget a bit to protect themselves against these kinds of price swings over time.
The bottom line is that material costs generally only move in one direction and that direction is up. So, over time, the cost of construction continues to rise due to material cost increases. One other reason most people don’t realize that contractors are so expensive is that they use lots of expensive tools. Over time, those tools wear out or break, necessitating the contractor to buy replacement tools necessary for future projects.
Why are Contractors so Expensive? – Project Complexity
The complexity of the project impacts the pricing. Renovations or custom builds that require specialized knowledge, intricate designs, or extensive permitting can require more time and skill, increasing the contractor’s fees.
Some projects are reasonably simple while others are much more complex and challenging. It should go without saying that a more challenging project will cause a contractor to be more expensive. More complicated projects require more skilled and detailed labor that will cost the contractor more to hire and retain. More challenging projects will also take longer to complete, requiring more time on the job.
But other elements of a construction project affect why a contractor might be so expensive, including some things that may not be so obvious. One is the location of the property; for example, a property high in the hills that takes a long time for a contractor’s staff to reach every morning is probably going to be more expensive. Alternatively, a project that’s hard to access will create more challenges and costs. For example, a contractor who’s building a pool in someone’s backyard will charge more if they cannot access the backyard with a piece of equipment that can dig a large hole for the pool, but rather needs to dig the hole by using workers with shovels.
Why are Contractors so Expensive? – Permitting and Inspections
Contractors must navigate city, county, and state regulations, which often involve acquiring permits and ensuring compliance with building codes. This bureaucratic process adds time and expense to any project.
Contractors know that most major renovation or construction projects require the acquisition of a city permit. Once the project is permitted, the city will send their inspector to review the quality of the project work from time to time. The contractor knows that working in a challenging city or municipality or being assigned an inspector who is ultra detail-oriented could cause delays on the project.
Just like teachers, there are inspectors with different levels of expectations. Some are perfectionists while others will give you a passing grade if you do sufficient work. Contractors know that delays caused by picky inspectors will not just create delays, but will, in turn, add costs to their project because they will need to spend more on their workers and crews to continually redo “imperfect work”.
For a consumer, getting a permit and having inspectors on your project is an extremely valuable service. The homeowner wants to make sure that their contractor is doing high-quality work and the best way to assure that is by having the inspector check this work periodically. So just be aware that although this process that occurs during construction will certainly make contractors more expensive, it’s an important value to your project that’s worth paying for.
Why are Contractors so Expensive? – Demand vs. Supply
In high-demand markets, particularly during housing booms, contractors can charge premium rates due to limited availability. Fewer contractors taking on projects can drive up the costs because clients have fewer options.
During a recession or when economic times are tough, contractors, just like anyone else are, willing to work for any reasonable amount of profit. However, when things get busy and there is more opportunity available for these same contractors, they are much more likely to accept the projects that are the most profitable for them.
For some time now, we’ve been going through a period where there seems to be more demand for construction and renovation than there are good contractors and skilled trades. As I mentioned above, during times like these good contractors can pick and choose which jobs they want to take, and of course they’re more likely to take the ones that are the most profitable.
Specifically, if a contractor is busy at any given time, they are more likely to give you a higher bid for your project because they aren’t really hungry for any more work. So it’s always wise to get at least three estimates from three different contractors for any specific construction or remodeling project just to ensure that any one contractor’s prices aren’t out of whack because they aren’t interested in more work at the time.
Why are Contractors so Expensive? – Long Warranties
Contractors take on substantial risks in each project. To mitigate potential liabilities, they need to price in the cost of warranties and the potential for rework or unexpected issues.
Just like a Lego set, contractors are using thousands of pieces of material to build a quality and cohesive final product. However, unlike a Lego set, they use hundreds or thousands of pieces of material that have not been perfectly manufactured to fit together just right for your specific project.
So even with the best contractors, after a project, there are bound to be small issues or concerns that arise after the work has been completed. This could be due to small defects in various materials or small oversights by the workers and crew. Either way, a good contractor always warranties their work and we’ll come back after a project is completed to fix any defects or issues.
Some contractors will offer a one-year warranty, while others we’ll keep coming back for even longer to address any homeowner issues or concerns. While this is an amazing level of customer service, it does cost the contractor money to send back his workers to correct these types of issues, and it’s wise for the contractor to bake these costs into their original bids and estimates to you as the client.
Why are Contractors so Expensive? – Time and Project Delays
One thing that’s universally known when it comes to construction is that there will be delays in almost every project. Sometimes it’s the fault of the contractor and oftentimes it could be completely outside of the contractor’s control. Contractors know full well that a project with significant delays will be less profitable for them so they do everything they can to get the job done as quickly as possible.
Delays will occur on every project and they will make the project more expensive for the contractor to complete. Contractors generally anticipate that projects will come with both delays and surprises which will increase their cost of performing the work. Most smart and reputable contractors will know to pad their budgets to ensure they have enough money to cover any of these sorts of unforeseen issues or delays. This, of course, translates to consumers feeling like contractors are often so expensive.
The bottom line is this: Contractors and major construction projects are expensive. And while hiring a contractor may seem more expensive than expected, the costs reflect the expertise, materials, labor, contingencies, and liability involved. Homeowners should consider the value they’re getting with a professional contractor and the long-term investment in their property.
Frequently Asked Questions
Why are contractors so expensive?
A contractor’s price covers much more than labor. It includes licensed subcontractors, materials plus a standard markup, insurance and licensing, permits, overhead, and a margin for the risk of quoting a fixed price. The best contractors also build in the cost of doing the job right and standing behind their work.
Is the cheapest contractor bid a good idea?
Usually not. A bid well below the others is often a sign of missing scope, cheaper materials, or a plan to make up the difference with change orders later. The cheapest bid frequently ends up costing more once problems appear. Compare bids on scope and value, not just price.
What is a normal contractor markup?
Contractors commonly mark up materials 15 to 35 percent and run a total markup of roughly 20 to 33 percent of the project. That covers ordering, delivery, storage, waste, warranty work, and overhead, so markup itself is not overcharging.
And if you want to make your remodeling process easier, you can contact GreatBuildz who will match you with great contractors who have already been thoroughly screened and vetted.
Just reach out to us to be personally matched with three of our trusted, pre-vetted contractors in the Bay Area and Southern California areas. Contact GreatBuildz today at 818.317.3567 or visit our website for more information.
