Should You Pay Referral Fees?

A couple of times a month I get a call from a fairly new contractor wanting to generate more leads and job opportunities. Usually, the questions include the topic of Plumbers and if they are a good lead source.


I’m all in favor of a contractor developing great lead sources. Even more so, I want contractors to build a steady stream of job opportunities. My frustration has always been with the issue of paying a referral fee. And, more specifically, exorbitant fees. Sure it’s done all over the US. But just because it’s done doesn’t make it right.

Most businesspeople have to ask themselves at some point; “how much of a referral fee should I pay to plumbers?” In many of the major cities (think Miami, LA, NY) some plumbers are demanding – and many contractors are paying one thousand dollars per lead! Yikes


Because the dollar amount is so high, you can’t help but wonder if this is right, ethical, fair, or even legit! With the average water-damage mitigation project averaging around $4,900 nationally, a $1,000 “finders fee” does one of two things – neither are good. First, it potentially increases the invoice on the project by $1,000, or about 20%. Second, if you truly do not raise your price, you really end up with very little or no profit when the job is done. The amount paid has to be reasonable, fair, and appropriate.

You can’t have it both ways. Either you raise your prices, or you make no money on your work. (Or do other things for the plumber that are big for them, and less for you).


Since I am not a fan of “finders fees,” referral fees, bird-dog fees, or “spiffs” being paid out, I won’t tell you how much is “fair.” I am willing to recognize that for a long time, referral or finders fees have been, and are currently being paid in many industries. We don’t tolerate this as a society when politicians accept money for “bribes.”

If we really analyze the concept from a different angle, we could justify that we are paying a “commission” to an independent plumber. Just remember, you wouldn’t pay a commission to an employee where the commission represented 20 – 30% of the actual job! Furthermore, they would at the minimum receive a 1099 tax statement from you at the end of the year, or else you’re going to pay tax on the money you give the plumber.


Too often, business owners are so desperate for a job that they willingly concede their integrity and find unique ways to justify these payments. It’s called “situational ethics.” When you engage in situational ethics – you will always be compromised!

I urge you to talk about the entire referral fee – commission payment idea with a trusted financial consultant. When you do this, you at least understand the true position and what the potential ramifications are.

Author:  Dick Wagner, Co-founder of the CREST Network

Dick Wagner is a Nationally recognized marketing coach, consultant, trainer, and speaker

Creator of the renowned PREP™ pre-disaster program

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