Hello everyone.
We have been working with a potential customer for several months now as they go through rounds of design and budgeting. They are hoping to build a modest home and shop/garage building. Their budget has contracted over the last several months just like many others have experienced. We have established a good rapport with these folks. They have expressed a great desire to work with us based on the rapport that we have established as well mutual shared values.
They have recently (most likely) settled on a kit home that we would be installing and they would insist on purchasing themselves out of pocket (approx $60,000). In addition, they will be installing a PV system and will be contracting directly with the PV contractor. They have also expressed interest in supplying some “unskilled labor” and have already milled up material taken from their building site that will supply a portion of interior and exterior finishes. In short, they will be heavily involved in the process and want to have the flexibility to handle various parts of the project. We, of course, recognize the potential pitfalls with this type of arrangement and would, at any rate, enter into an agreement with plenty of reservations and an attempt to cover ourselves well at contract time.
But wait, it gets more complex. We have suggested that considering everything, we would feel most comfortable entering into a time and materials contract, with markup charged on all materials and subs. This might still be a troublesome arrangement as we would be handling a huge portion of the material for the house construction with no ability to markup those materials. The customers, however, have taken issue with the way we generally handle T and M projects. The markup on materials and suppliers is where they balk. They feel that it is a “cumbersome” system that leads to “unduly fattened” bids and (rightly so) provides no incentive for us to keep costs down.
They are suggesting a system where we establish a flat rate for the dollar amount that we would like to earn to cover overhead and profit and then pass through expenses to them at cost. They have even suggested some arrangement where we might split the savings if we are able to beat bids that they solicit from subs that they contact on their own. They assure us that they aren’t trying to needle us down on price
We are trying to maintain an open mind about this project and are willing to explore alternate pricing structures but feel fairly nervous about allowing a client to dictate how we handle our books.
Has anyone out there found a good way to proceed with some type of arrangement like our clients are suggesting? We would like to make the sale but are looking for a little guidance (maybe time to call the attorney).
Replies
Increase your hourly rate, let them buy everything and let them know you are on the clock. So long as you cover overhead and profit, you can readily move O+P from sub and material markup to your labor. Your contract needs to void all warranties associated with work utilizing materials or subs contracted by owner. No profit for you on those item-no risk either.
Even though they are not trying to needle you down, they are. When you give, they need to give as well.
This was our first thought. We normally charge $45/hour for carpentry. Going over a couple of "average" jobs that we have completed, we figure we would need to add around $7-$8 per hour to get an "average" job to gross out to about the same if we forgo markup on materials and subs. I'm quite sure this would be a deal breaker for these clients. If they can't agree, I suppose it should be a deal breaker for us too????? Perhaps we should simply offer our services on a labor only basis, no subs, no materials, no management, no promises, no guarantees.
I know it is hard to give up work, but if you ain't making money what is the point. As Mike said, it has not gotten any cheaper to do work these days.
Best of luck,
Bruce
It is hard to give up work. Fortunately, we appear to be looking very good this year and probably could afford to give up this one. I'm inclined to go ahead and try to figure out a way to make it work as long as we can go into it feeling well covered by the contract. What I don't want to do is lose a bunch of hours to re-writing our existing contract, re-working our billing system and educating our bookkeeper in order to make the clients feel that they aren't getting taken advantage of.
Why doesn't the client go find the GC that builds the way they wants and bills/runs their business the way the client wants? While they are at it, they should find an outfit that allows clients to decide scope and price.Maybe I'm a little grumpy because I had a meeting with an arch. this morning about a project that was bid by a few companies. The bid sheet was complex and had lots of alternates, and it took me 12-18 hours to generate our proposal.They ended up with 3 bids (they were expecting 5). Mine and another were within 5% of eachother, but the other bid didn't follow the bidsheet very closely. We both estimated 4 months to completion. The 3rd bid was verbal, 50% of ours, and 5 weeks to completion. The clients _say_ they aren't trying to talk me down, but why am I hearing about a 50% bid?As it happens I have an interest in doing projects with the arch, so we met and he explained things and asked me what we could do. I told him we could take a hatchet to scope.I'll rebid on the reduced scope, to keep it professional w/ the arch. I don't think there is much the client could do at this point to keep me interested in them though. Because ultimately, this business is about trust. Trust the shower won't leak, trust I won't use Piffins instead of GRKs, trust I won't rifle through a clients belongings and steal, and trust a client will pay ontime and with a smile.If they don't trust that your pricing structure is fair and decent, they need another GC!
Sounds like a flat fee contract. Lot of commercial work is done that way.
Pitfalls?
A) job goes longer than expected.
Probable if they are handling materials and soliciting subs.
B) Unknown to you subs
Don't know quality of work. risk is rework or longer schedule time and longer build time. The sub is also beholden to the HO and not the GC. HO asks them to deviate from plans. You are not informed. chaos ensues
C) Material unknown to you
HO buys some off the wall product they sourced on the internet. Directions written in Chinese. Product does not match up to rest of the plans. Product looks good on the internet but not so good on site. chaos ensues
D) HO is to perform manuel labor over the weekend. They attend a party instead. Where is your schedule?
E) Kit home is not up to manufacturers claimed standards. Rework is needed. Who pays?
I'm only about halfway through the list.
These can all be worked around. When it is done in Commercial work there are more known quantities in regards to trades, materials and performance specs.
If we were to go flat fee, I would want to make it a per day or per week at the most. If we offer a fee for the whole job we would get into trouble when the schedule gets blown for any reason.
city... this ain't sounding good at all
they want you to offer bids against their subs, they are going to be heavily involved, yet they don't know squat about scheduling or supervising
so.. who schedules and supervises "their " subs ?
they are definitely going to be watching the clock, so every invoice you submit for time is going to turn into a contested review
i think thye feel that because of the financial downturn we are in that costs have fallen... but that isn't true... costs have increased
some people are willing to work for less than cost , but they are going to windo up unable to financially perform
i think you have to decide how yu want to proceed with yur clients and firm up your proposal.. get them off the fence
if they can't commit to a reasonable proposal, walk awayMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
>>city... this ain't sounding good at all
+1
Sounds like a disaster in the making.
1. Usually, with commercial work, both parties have done it before and know their role. With this cast of characters, they are making it up as they go along.
2. You're businessman. You are in business to make money. So are they. One way you make money is to charge a % on materials. if you don't charge it there, you have to charge it somewhere else. they simply don't want you to charge it. By inflating another price/ cost you are playing games.
3. If you play by their rules you'll be on your way out of business. The next customer or you will have to pay for the money lost/ not made on this job. This is simply not an acceptable practice. If the next client knows this client your sunk.
4. Having other contractors on the site who are not beholden to you, even though you are the biggest player on the site, will only serve to impose hurdles. Do you need that?
5. Last, the lay person seems insistent on defining the terms. Ask the happy couple when they allowed a client of theirs to define the contract terms to the same extent.
Been there. Done that. Right now they have only their time invested in the project. Wait until they start investing (lots of) money. Zing! That's when the real negotiation begins.
You're smartest move might be to tell them what YOUR terms are (screw theirs) and tell them that it is your professional opinion and expertise from X years in the business (there's that word again) that you are doing them a favor by sticking to your guns/ terms and your way will ultimately be the least expensive way to go. If you do this respectfully, with confidence and compassion, they may come around. However, for that result, they'll need to appreciate that you are trying to save them from themselves.
A man can dream,
Frankie
Flay your Suffolk bought-this-morning sole with organic hand-cracked pepper and blasted salt.
Thrill each side for four minutes at torchmark haut. Interrogate a lemon.
Embarrass any tough roots from the samphire. Then bamboozle till it's al dente with that certain je ne sais quoi.
Arabella Weir as Minty Marchmont - Posh Nosh
The arrangement they are looking for is a "cost plus a fixed fee" contract.
The fixed fee covers the builder duties but no labor, skilled or other wise.
So, in theory, you will GC the job at say, 15% of the estimated value, and get that money in scheduled payments. You would bill separately for any labor done on the job. Your labor might even have to be bid competitively and you might have to offer fixed fee proposals for your subcontracting skills.
What is wrong with this relationship? Nothing. Just get that fixed fee right at the beginning and you are good to go.
Make no mistake, these folks are squeezing nickles, they will count upon your knowledge and your helpful nature to watch over and manage their project, to tell them the next step, and point out conflicts and errors before they cost them, they want your "book" of subs. They do not want to pay you for any of this!
If you still think you want to do it, I agree with Blue... You need to paid(weekly) as the GC for the project and separately as a sub (fixed price contracts) for the tasks your crew will perform. Otherwise, you will be accepting responsibility without control. They will try to skip the GC payment when your crew is on site "because you guys are here anyway"...
It is a road fraught with peril and the chance of you getting out with the reputation that carried you in, is very, very, slim.
I would bid(fixed price) on one or tasks that interest me and just pass on the rest.
Jim
The awful thing is that beauty is mysterious as well as terrible. God and the devil are fighting there, and the battlefield is the heart of man.
- Fyodor Dostoyevski
Jim, you are making it sound much more negative than I view it. Many of the successful builders I used to work for only worked on a cost plus fixed fee basis. I've done one myself that worked perfectly for both of us.
I cannot see any problem with the arrangement unless the fixed fee at the beginning is negotiated wrong.
I wouldn't suggest that the fee be paid weekly. I would tie it to progress anniversaries. That way, if the owners found a way to drag the job out for two years, the amount of fee paid out would always be proportionate. Keep in mind that if there was nothing happening, the builder wouldn't have any reason to visit the site, so the true amount of time involved would be proportionate to the paid fees.
Also, remember that the OP said it was a modest house. Theoretically, each sub phase will be relatively easy and it won't stretch out for two years.
With so few contractors understanding overhead and how to charge for it, it would be expected that homeowners wouldn't have a clue about it either. Yet this couple is questioning your business model and how you handle overhead every step of the way.
With the couple wanting to: 1) schedule certain subs, 2) provide some materials, 3) provide their own labor, they are substituting variables for knowns and that can prohibit a successful fixed-price bid.
Yet when you shift gears to T&M, they don't want to pay you for all of your time or all of your materials? They're trying to be co-GC's without fully compensating you for your portion of the GC's job.
T&M can be a great way to work these "iffy" situations. Yet by saying that T&M "...is a "cumbersome" system that leads to "unduly fattened" bids and (rightly so) provides no incentive for you to keep costs down..." they are really saying that you don't have the moral soul to complete the job in a timely manner. They have essentially come out and told you that they don't trust you.
Be careful. This could turn into a job where every time one of your guys picks up a 2x4 off the stack, the homeowner comes rushing over to ask "how long do you need it to be" and then runs over to the scrap pile, sifting through to see if there is one that could be used in its place. Sure they'll have saved themselves 23 cents in materials by finding that useable 2x4, but they'll have cost you $1.25 in labor while your guy stood around scratching his head.
If this is a good couple and you really want the job, they just might need a heart-to-heart sit-down talk. They might not know how intrusive they are being. It's fine to want to help, it's fine to want to pare costs. But you, as an employer, have responsibilities to your employees, your suppliers, and your family.
Thanks Mongo and everyone for the comments, I'm soaking this up.
I've been in a similar situation that you are in, and I handled it with a cost plus fixed fee contract. I think that this type of contract is by far the most fair way of contracting, as there is no incentive to let costs creep as with T&M and there is no need to pad the price as with fixed quoted prices.
However... I will never use this system again, because fair just doesn't work in business. I only do quoted fixed prices now, because I always end up negotiating or explaining myself forever with T&M or cost plus contracts. By being transparent, the client can't help but beat you up on price.
The fact is, fixed price contracts are contractually very black and white compared with other systems. If the contract says pay this amount at this time, there is no ambiguity. I've actually had clients tell me that I ran the job inefficiently and that the end cost on a T&M job was far too high and they just wouldn't pay it. Try fighting that in court. There's a lot of grey area there, and it's your word against theirs. They could even dispute how many hours you've put in.
What I would do in your shoes now, is submit a fixed price quote for the entire job, adding profit and over-head based on my estimated value for the materials they supply. If they don't like the price, they can have other contractors do the exact same thing.
Black and white. Sustainable business. What good are you as a contractor, if you are out of business in a couple years because you did anything a client wanted? Who will take care of warranty work? A client should respect the business of contracting, as it serves them too.
"I've actually had clients tell me that I ran the job inefficiently and that the end cost on a T&M job was far too high and they just wouldn't pay it. Try fighting that in court. There's a lot of grey area there, and it's your word against theirs. They could even dispute how many hours you've put in. "
It sounds like an easy case to make in court. How did the judge rule in your case? I'm going to guess that you failed to litigate it.
A "cost plus fixed fee" shouldn't be about "hours you've put in" or "innefficient". A GC agrees to get a building standing and if it's standing and passes the quality test (municipal inspections), the fee is owed.
I think you are confusing the "cost" with your "subcontract labor bid". I'll agree that it might be dangerous to mix the two without two separate contracts. Even then, there could be a conflict of interest argument.
In a cost plus fixed fee contract, the costs are unknown. Only the fee is known. The costs could go up or down and are paid directly by the owners.
jim.... you said to tie the fixed fee to landmarks... but that is fraught with danger
overhead & profit are time based
the business has to have a certain amount comming in to continue
but if he is committed to this particular job then he is at their beck and call all the time ...wether they are making good progress or not
i did one based on a 10 month estimated time of completion, the job wound uo at 16
needless to say, the fixed fee was insuffuicient
some people like t&m....but i don't....i use it from time to time , mostly on change orders
but evcen there i would much prefer fixed feeMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
House I finished last year... cost plus fixed fee. I billed all job costs on a biweekly basis and billed a percentage of the fee on each invoice. Contract called for X amount of fee (about 5 percent of it) to be payable with the final invoice, when there was no more than $1000 in work remaining (i.e. punchlist). There were two invoices at the end where the fixed fee had been entirely billed out (aside from the holdback of X) so I went one month with no fee coming in. You could also say I had been prepaid for that month.
This is a very workable model IMO. The owner does not get uptight every time they make a change that increases costs slightly because you are not stamping a percentage on it. You need to know how long the job will take and how much OH you will incur during that period. You need to know how many labor hours will go into the job. You need to allot for warranty and risk. You need to allot for insuring the job (i.e. my GL is a percentage of gross). It is not a substitute for careful estimating and planning.
On this job, the owner splurged in a few places. A modest master bath became tile and stone palace. Simple cabinets became very nice customs. Costs went up for materials and to a lesser extent for subs. Materials costs increases hardly effect my cost. Sub costs do to a small extent because I pay 2-point-something percent of sub costs as GL premiums. The owner did not see increased OH&P because of these changes.
As a hedge against time overrun I also billed a monthly management fee. Fairly modest amount but I got that as long as the job was still underway. If the owner decides to slow things way down somehow then there is still money coming in. It gives them incentive.
At this point I will not "bid" a custom house or a large and complicated remodel. I will do cost plus, or cost plus a fixed fee. I know that what you are doing is working for you, and I would not change it.
It sounds like you have your ducks all lined up yourself. I like the idea of the small monthly management fee as an add on to the fixed fee.
I understand some of your concern but Mike, keep in mind that the OP stated that it is a modest house and garage. I'm going to assume that modest is NOT a 7000 sf cut up monster with 35 ridges and 65 windows.
Given that it is a modest home, even if things go sloooooow, the OP, as the GC, will not have to be there 24/7.
The GC does not have to be at anyone's beck and call just because of a signed contract. The GC still retains his rights of being an independent contractor and can GC the job in his normal manner, which might only require a five minute site visit each day that workers are present. So, if the owners cause this job to stand idle for a month, there might not be any site visits at all.
I just don't think that every client that attempts to save as much money as they think they can should be tossed out the window with the bath water. Each of us has a different tolerance for how we conduct business and I would be perfectly happy GCing that modest house, working with those owners, trying to save them as much money as I could for 15-20%. If I'm slow, 15% is great. If I'm busy, 20% is my number.
Remember, it's a sure thing...no risk other than something self inflicted. I'd set up a pay schedule that is proportionate to my time investment, then stop working if any payment was breached....according to the written contract.
I wrote about both T&M and Cost plus fixed fee. I see these as two separate fee systems. T&M is linear with the fee directly attached to cost, while as you mentioned, cost plus fixed fee, the fee is fixed. But what they share is that if I as GC get paid a fixed fee to oversee, my crew's hours to actually do the work may be open to conflict. This is where it becomes your word against theirs. As I said, I've tried all three systems, and now stick to quoted prices on all jobs of any real size.
Update.My partners and I have chosen to at least keep talking with the potential clients. It seems that a cost plus fixed fee (time or phase) would be the way to go here. They will attempt to negotiate the fee, which is certainly reasonable, though we won't accept less than what we would earn on any other project. We have pointed out that we will seek to get compensated one way or the other for the time that we spend developing a new contract and learning how to run a job in a different way than we normally do (ie this could cost them more in the end).One huge issue for me is how to manage our liability on owner supplied materials. Theoretically, our fee should cover us enough to take responsibility for errors, accidents, breakage, miscuts etc on anything supplied by the owner. I think I would still try to argue that we would expressly NOT be responsible for replacement of anything we render unusable. Nor would we warranty those materials. I may be off base here however. Thoughts?Still feeling skeptical of the project mostly because I'm afraid that these folks could prove to very difficult to work for.
You'll need a detailed contract stating who is responsible for the different stages of construction. Let them know that there will be no firm completion date due to the ambiguities of your role in the project and due to several people playing the GC role. Let them know that your insurance and bonding will not apply to the parts they are GCing. Let them know that you will not be able to offer a warranty on the materials that they are supplying. You will be installing them "as is." Let them know that they will need to have sufficient materials on hand to keep up with the pace of construction. Any down time on your end while you wait for them, you're still on the clock.Let them know that all change orders will be in writing, the order will be signed by both the husband and wife, and paid for at the time the change is executed, and all monies exchanged as part of change orders are above those listed in the contract.Don't go muddling your fees by letting something slide here because you can make it up over there. Keep the books nice and purdy.Are you pulling the permit in your name? Or is the homeowner pulling it in theirs? Know the responsibility and leverage of going each way on that one.
I've dealt with several clients who wanted to micro-manage their job and the materials, during difficult economic periods.
I just pulled back to a time only deal with a very simple contract, one which defined my duties and states that either party can bail out of the job at any time. I worked for them as an hourly wage employee, paid weekly. They provided everything that employer must by law. Our agreement specified a minimum number of hours per week.
If they want to play GC, let them...if you really need the job. Otherwise, for-get-it.
By the way, one mistake I made was to get into a time plus bonus deal with one client. The contract was too vague for me to take him to court when he refused to pay.
You may believe that you're on the same page with these clients, regarding values, but it's more likely that they're stringing you along. Happens all the time.