Industry Mark-ups: How Much Is Too Much? 1

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Thursday, July 7th, 2016
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The price of a product or service plays a large part in how well it sells. In the architecture, building, construction and fit-out space, there are a lot of high-priced products supplied by companies all striving to do what companies are designed to do – make a profit and return a share to stakeholders or owners.

But how much is too much? I’m not advocating we work for free – there are too many highly skilled people, with numerous qualifications, let alone the myriad of well-engineered products deserving of their price tag – but at what point does a healthy margin become, well, greed?

I’m sure I’m not the only one pondering it. Social enterprises are on the rise. Not-for-profits like Habitat for Humanity address safe housing, or, closer to home in Australia, organisations such as St George Community Housing build affordable housing for workers on a low income who may not be eligible for social housing but are struggling to find a home in the private rental market.

It all points to something beyond profit. The latest report from the Social Progress Index showed Australia was the 10th most socially advanced nation in the world but 19th for shelter and 51st for housing affordability. Affordable housing is certainly an issue. Is the industry supply chain – and all its associated mark-ups along the way – adding to it?

By law, producers and retailers are expected to practice ethical pricing strategies to earn profits without defrauding competitors or consumers. As margins add up along a supply chain, there may not be fraud occurring, but how transparent is it to the client?

Take the office tenant who chooses the one-stop shop for his fit-out over sourcing different options on design, supply and finishes. Is the tenant aware of the hidden costs and potential markups on furniture, finishes and so on, or do they simply prefer the convenience of a one-stop shop approach, even if there could be thousands of dollars in savings with a bit of ‘shopping’ around?

I’m not suggesting one way is better than another, I’m simply interested in wider discussion. If your client has a $300,000 budget yet you can deliver the job for $200,000, do you mention it? When does a margin move from healthy to ridiculous? In the scenario I just mentioned, is the tenant being looked after if margins are so high, or does only the one-stop shop benefit?

Or do you simply think it is a case of the buyer needing to be aware and doing more research?

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  1. David Chandler

    Ruth, great to press this discussion. It is coming to construction faster than most anticipate. Early developments in the collaborative economy have shown what can happen when consumers become fed up with the traditional institutions. Its not just the end consumer that is showing signs of having had enough. Up and down construction's supply chain vendors see their product being undervalued while the overheads of those along the way add huge avoidable cost for little end or original vendor benefit. For example I recently gave a keynote on timber. For a $350,000 house, it would be normal that the timber framing would cost about $35,000 erected on site. Following this down the timber value chain I estimated that the tree grower got about $1250 of this. The accumulated over head and profit of all the vendors including the builder for the whole house may have exceeded 35% of the total cost. That's on a project home.
    For multi-unit, add the developer markup and profit of 25%. This was the thinking behind my recent Sourceable article: https://sourceable.net/a-case-to-disrupt-the-traditional-developer-multi-unit-housing-delivery-model/ .
    At last months Construction Technology Summit in Melbourne, it is clear that enabling technology and business system apps now allow for wholesale value chain reorganisation to cut out much of the industry's waste and costs, while the prospects for end customers getting a better deal lift substantially. I predict the biggest leap will be better integrity in the quality and compliance chains of custody for delivering new dwellings, and far better warranty products for consumers than the vagaries of the current home owner warranty insurance schemes. And what schemes they are.