Replies

1. 
   Piffin | Oct 23, 2003 04:08am | #1

   It is the percentage that you and the client agree on added over whatever the two of you aggree the "costs" are defined to be. A recent thread here ( I think entitled 'cost plus a sham?') exposed the fact that not everyone agrees what a cost is.

   Look at this - if your overhead expenses are eleven percent of your gross, you don't somehow include those expenses in the "cost" and you charge a "plus" of only ten percent for markup, you are losing money."

   A contract should spell out how this is handled. Cleanest is probably to define cost as exactly what it costs you to have the material and services and subs delivered or installed, including sales taxes. Then make your "plus" percentage be large enough to cover both overhead and profit, making it clear to the customer that it is not all going into your pocket but that it covers both.

   There are other direct costs of a job that should be included in the "cost" and in the contract spelling them out, that a customer might assume should be part of your overhead. Things such as specific job risk insurances, long distance telephone calls to place or chase materials orders, portapotty rentals, special tool or equipment rentals, custom tooling charges, utilities, film processing...

   When spelling these out in the contract under the costs definitions, use terms such as "Accessory items for job specific expenses, including but not limnited to..." so as not to limit the items you might be charging extra for.

   .

   Excellence is its own reward!

1. 
   OneofmanyBobs | Oct 23, 2003 07:55pm | #2

   Government work has CPF (cost plus fee) and CPFF (cost plus fixed fee) flavors.  You estimate the cost and estimate the fee and give that to the customer.  The overhead has to be included as a part of the cost.  The government likes CPFF because if you foul up the estimate (accidental or deliberate), you don't get extra fee because of the mistake.   You do need to know your true overhead accurately otherwise you can have problems.  But, fee in the range of 5 to 15% on top of overhead can be practical.  Also, make sure that with CPFF any changes made by the customer are covered.  If they double the job of their own accord, you don't want to be left with half the profit.  You can make a higher profit with fixed price, but you also have higher risk.  With any CPF or CPFF you are also disclosing to the customer what your profit and overhead is.  Not always the best thing and it can cause some disagreements.  The government insists on an audit to verify your overhead.  You can always trust the government, right?  Including your overhead in the fee makes it harder for the customer to figure what your actual profit will be.  Generally a good thing.

1. 
   Piffin | Oct 24, 2003 03:57am | #3

   It has been maybe twenty years since i did any Govt work and that was always on a bid firm price contract. The paperwork was always a headache and gave me a COUGH.

   Change

   Order

   Ugliness

   in

   Govt

   Handling

   .

   Excellence is its own reward!

1. 
   OneofmanyBobs | Oct 24, 2003 01:00pm | #4

   I hate government work.  The paper multiplies, the margins get smaller.  Even with Firm Fixed Price, they want to limit your margins.  They do pay fairly reliably but its a bigger pain than its worth.  Not bad if you're a 50,000 man multinational corporation, but as a small operator it is a real pain.

2. 
   JerraldHayes | Oct 25, 2003 01:37am | #7

   Bob as you know that consulting gig I've been on is all about a government contract and while it is aerospace and not building it is a CPFF they work with and unlike the collections of sentences and a few papragraphs that I described above that we should be using there are 19 pages defining what is a COST and what is a FEE on the contract we are working on there! I was up there again this week which put me, a diehard Yankee fan, right in the midst of 18 Boston and 1 Atlanta fan. I was lucky to escape with my life.

   (I've got the right Bob correct?)

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1. 
   OneofmanyBobs | Oct 25, 2003 02:46am | #8

   I don't like the AGC AIA language at all.  My overhead is a part of my costs, including phone costs, heat, rent, electricity, etc.  Government segregates cost into direct and indirect.  The indirects can be a predictable percentage of direct costs for most organizations.  You can't necessarily account that a specific percentage of your rent or tool maintenance charges against a particular project, but over the whole organization you can generally predict that your indirects will be a certain percentage of the direct costs.  The government audits your rates and certifies that your indirect costs are justified and reasonable.  Then you bid based on the direct costs (salary, materials, services) plus your indirect rate times the direct costs, plus fee. 

   In theory, the government is not allowed to let you lose money and must pay a "fair" price.  In practice, they come over and say "gee, all the other guys have lower indirects for this type of work.  You'll have to cut yours to be competitive".  Then you establish a new "cost center" for that bid and shaft the employees by cutting the historical benefits, vacation, etc that you pay to those employees.  You make money on the volume there.  If you don't have a big group doing government, its generally not worth the effort.  Lowest cost, best value, special exceptions, politics.  A huge pain.  Also requires special certifiable accounting practices and software.  Skilled back-office people who understand the game.  It is a game.  Profitable for those who know the rules and total confusion for those who don't.  Often the difference between a profitable effort and a loss is the skill of your accounting staff, not the engineering and execution.

   "19 pages defining what is a COST and what is a FEE "

   You're lucky.  Pretty slim contract there.  I've seen 250 pages of jargon on a small contract.  Often rated by how many pounds of contract documents exist per thousand of cost.  Probably around a pound per $ thousand.

1. 
   Piffin | Oct 25, 2003 04:32am | #10

   " Pretty slim contract there. I've seen 250 pages of jargon on a small contract. Often rated by how many pounds of contract documents exist per thousand of cost."

   Whoa Nellie!

   This poor guy is a small outfit just getting into this. You'll scare the labels right off'n his t-shirts with talk like that.

   .

   Excellence is its own reward!

2. 
   OneofmanyBobs | Oct 25, 2003 02:16pm | #11

   "This poor guy is a small outfit just getting into this. You'll scare the labels right off'n his t-shirts with talk like that. "

   Should be scared.  Some things are not so bad even if you're not real experienced.  A kitchen remodel or maybe a mission to mars.  Getting involved with the lawyers and accountants scares the pants off of me.  Would rather remove my own appendix with a drywall knife.

   Cost plus tend to be larger contracts, otherwise the customer wouldn't be so interested in doing something that complicated or uncertain (as far as final price).  They believe it will be cheaper, but the total price is not absolutely defined at the beginning.  It is vastly simpler to look at a job, scratch you head (or other body parts), and pick a number.  "That will be $29.95, You want it gift wrapped?".

   In theory, the risk is lower for the contractor.  In practice, this hinges on a detailed and accurate understanding of your own overhead costs.  Also, you'll be figuring in all the complicated intangibles.  Depreciation, and all that jazz.  I don't want to scare people away, but I wouldn't do a cost-plus without a really good estimator/administrator/manager who has prior experience with this sort of contract.  I know that I'm not good enough to attempt this by myself.  As far as this being a good option for small contractors, maybe not.  You tend to become a contractor because you're good at building stuff, not because you're an expert accountant.  In this case, the fee tends to be lower than usual.  Maybe 5% after taking out your true overhead, at least that's the case with federal and municipal work.  So, if you do not know your own overhead costs within a percent or two, the risk can be actually higher for the contractor.

   Is it actually cheaper for the customer?  Maybe.  My salary is a cost to the company, but a profit to me.  I bill my salary plus the crew as a cost to the customer.  What if I don't play fair?  My salary is now a million dollars an hour.  I bid the job at a very low fee.  The company makes almost nothing, but I make a killing and the customer pays dearly.  On paper, things may look fair.  This is why the government insists on audits.  Not generally necessary for commercial work.  Complicated for both the buyer and contractor.  As has been said here many times, "Do not try this at home.  I am a trained proferssional".  I've been on both sides of the fence.  If I were contracting something for myself, I would want either fixed price or time and materials.  If things get out of hand on T&M, you just say "stop" and cut your losses.  On cost plus, you go into a contract dispute and that gets messy. Really, really messy.  One hour of a lawyer's time costs as much as a whole day for the entire framing crew.

2. 
   JerraldHayes | Oct 25, 2003 01:35am | #6

   Piffen last weekend when you wrote:

   "I disagree with Jerald's opinion that all work should be bid at firm rates but agree with him that in any contract, everything should be defined and settled before beginning. If you are working on a handshake only, this is the time to settle the details defining what cost is before your pants get pulled down any further. if you have a wrotten contract, the definition should be in there and all these opinions mean squat. In that case, good luck, you'll need it. "

   I wrote a response to you because we don't entirely disagree on that at all but by the time I got around to posting it a cat fight had erupted in the thread and I didn't want to step in in the middle of that. Anyway what I wanted to say at the time was that I am not ABSOLUTLY opposed to CPFF work and I am in fact in the early stages of negotiating a a project which I think is best approached on a CPFF basis but I do GENERALLY discourage that kind of work and prefer submitting Fixed Price Lump Sum bids and hopefully we can get this all back on track here again and get in to a worthwhile discussion on that this time. I don't know if you ever saw the unfortunate mess that the 'cost plus a sham?' topic disintegrated into but I'm glad it got deleted.

   But as you I guess already know I do however think the conditions and definitions of just what is a COST and what is a FEE should be written down and I personally do not trust handshake agreements and I don't and wont risk the health of my company or the potential welfare of my employees on JUST a handshake. Geez it's the digital age, the age of computers, and it's so incredibly easy to just write this stuff down as boilerplate and use it over and over again and so I think any argument for handshake agreements is more about personal pride than good business sense in my humble opinion. I write stuff down.

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1. 
   Piffin | Oct 25, 2003 04:25am | #9

   JH, I guess that I missed all the fun of that thread breaking down, but now I know why I couldn't find a link for it.

   I do think we are agreed on some oif those details but we each just have a preference for one kind of deal over another.

   Like with marriage, My type of woman may be different than yours from personal preferences, but we would both agree, I suppose, that clear communications and trust are the basis for a good life together.

   Same with contracts..

   Excellence is its own reward!

2. 
   JerraldHayes | Oct 25, 2003 01:29am | #5

   Mikewest Piffen is correct that there was a recent discussion here called 'cost plus a sham?' but the powers to be at Taunton deleted it when a few people in there got ugly with each other. It a shame that for the sake of some petty and catty name calling some really good content there got lost. SCHELLINGM & RW were just getting getting everyone started on a GOOD debate regarding the relative merits of Cost Plus Fixed Fee work vs Fixed Price Lump Sum contracts when it got yanked.

   Fortunately I have that whole thread saved to disk so I still know what everyone said and perhaps more importantly (at least to me) what I said so I don't have to recompose and retype everything all over again! I can just cut and paste what I already wrote! Well that said what I wrote last Saturday was: 

   From:  Jerrald Hayes  Oct-18 3:11 pm To:  Resurrected In AIA & AGC documents this kind of stuff is explicitly defined and it's my understanding that because of the widespread acceptance and use of those documents that in circumstances where the elements of what constitutes a COST and what is covered by the FIXED FEE are not explicitly defined AIA & AGC definitions can become the default since it can be assumed that the client probably inferred those were the definitions that were going to be used. As best I can tell from Allents descriptions the AGC agreement that would cover his project arrangement would be AGC 566 - Standard Form of Agreement Between Owner and Construction Manager (Where the Construction Manager Is Also the Constructor and Where the Basis of Payment Is the Cost of the Work Plus a Fee and There Is No Guarantee of Cost). I don't have a copy of that specific agreement in my files anymore but if it is like the others in the 500 Construction Management Series then there are articles in it that describe the : Construction Manager's Services Owners Responsibilities Trade Contracts Project Schedule Construction Manager's Fee Reimbursable Costs (...skipping over a few articles here...) Termination of the Agreement All those things sound like stuff that wasn't clearly defined in Allents project or he just hasn't filled us in on. Personally I think those AGC AIA agreements may be legal overkill for a contractor and owner building a small simple addition like Allent's but even looking at the Cost plus Fixed fee Agreement that appears in Gary Ransone's The Contractor's Legal Kit : The Complete User-Friendly Legal Guide for Home Builders and Remodelers he has a section entitled Costs To Be Reimbursed that includes stuff like: Labor Costs: The rate schedule for what is defined as COST for the GC-CMs own company personnel working on the project. In Ransone's agreement template he spells out that this is clearly "the gross amount to be charged for each worker (any and all applicable labor burden, medical and retirement benefits, bonuses, etc. Have been factored into these rates)" Workers Comp is recovered here as part of a Labor Cost Burden factored into the rate schedule. While Ransone doesn't say so I think General Liability depending on whether your insurance company figures it based on payroll or total sales may or may not be figured in and recovered here. That all depends and needs to be figured out what works best for the GC-CM. If it based on total sales then it might be better recovered for as part of the FEE. And also in Ransone's agreement he smartly recommends including a rate for the "clerical time spent preparing payment applications." Contractor's Supervisory Personnel: To explain how supervisory personnel will be compensated for for both on-site and off site activities. Cost of Time Spent Picking Up Materials And Mobilizing Job: This is often an area not even considered by homeowner customers and sometimes they may be reluctant to pay for it (especially if they see excessive trips out to get materials and supplies). Subcontract Costs: Sort of obvious but still should be clearly described and included. Cost of Materials Incorporated Into The Project: The cost of materials and equipment and the applicable sales tax, freight, or delivery charges plus how unused material is going to be credited or accounted for. Costs of Other Materials, Equipment, Temporary Equipment, Taxes, Security, And Related Items: Monthly utility fees, port a-potty, scaffolding, refuse removal etc. Emergency Repairs And Precautions: Things like temporary fencing to protect the public or workers and stuff like work to protect the project from the hurricane or a blizzard that might come through. Then his agreement goes on to explain the Costs Not To Be Reimbursed which can be assumed to be covered by the FEE. Things like: "Any general insurance costs and state and federal taxes of contractor (e.g., Worker's compensation, comprehensive general liability insurance, auto insurance, health insurance, or labor burden expenses, such as state and federal employer taxes, etc.). Contractor has factored these costs into the rate schedule for contractor's personnel in the Labor Cost section above, or these costs will be paid out of contractor's profit and overhead percentage." Travel time to and from the job site for contractor and his employees. Costs to purchase, repair, and maintain contractor's tools, vehicles, and equipment. Cellular phone charges (unless specifically agreed to in writing by owner and contractor). And while Ransone doesn't mention it in his agreement it's also a good idea to spell out that the salaries of your general office personnel are not reimbursable since they can be applied to all the projects the GM-GC has going and generally not specifically by any single project except perhaps in the preparation of the work records mentioned above. And as an extension of that your office or shop rent or costs of office equipment is generally not reimbursable since it can't be specifically allocated to specific projects. It's recovered and paid for as part of that FEE. For instance a contractor doing Allent's project would not be giving him a bill for the monthly lease payment on a computer or the monthly phone & electric bill. That's what I meant by "define". All that said the FEE is used recover an appropriate portion of the GC-CM company's Fixed Overhead and perhaps most importantly account for a Profit. The reason I say it's important to define that is in a good friend of mine's company he recovers for Contractor's Supervisory Personnel as part of his company's Fixed Overhead. In my company we figure for Supervisory Personnel on a project by project basis since for us supervision requirements would tend to vary greatly. So if my buddy's company and mine were both to look at the same project on a Cost Plus Fixed Fee basis in the end while the total cost of the project would probably turn out the same his FEE would be higher than mine while my COSTS would be higher than his.

   Resurrected felt I was over-complicating things making "a simple thing into a complex thing" and that he felt "Cost plus is one of the easiest payment methods a GC can get himself into. " (to which I totally agree with him on that particular point) but what I disagreed with was that he said it was sufficient just to say "the person paying, pays for everything plus a certain percentage of everything. Everything "+" a certain percentage of everything is the total that must be paid by the person paying. "

   I there's the rub, ...(from Hamlets "To Be, or Not to Be" Soliloquy). It was apparent from the way the thread then disintegrated into chaos that not everyone could agree on what EVERYTHING meant so I still stand by my position that it's a better practice to define in writing just what a COST is and just what is covered by the FEE as in that language above to avoid the potential disagreement and controversy.

   So Mikewest I do therefore recomend you check out Gary Ransone's The Contractor's Legal Kit to see what it has to say and then make your own judgements on all this. The Amazon link I gave says "Out of Print--Limited Availability" but that because there is a new revised edition was just realeased so keep your eye out for it. I also see it often enough on the shelves in a Borders Books stores here and there.

   ---

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