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My partner and I have historically done fixed-price semi-custom and custom homes, whether on our lot or buyer’s lot. A current client wants a cost-plus a % deal. We have checked with NAHB and a couple of other sources and gotten results that are all over the board, especially in terms of the % and structure for what’s billed for field expenses and even overhead. Who has done cost-plus deals and how did you structure them?
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you guys still have to figure the job... then just restrucutre it.... since the customer is assuming the risk.. you can give them a couple points..
.. i like to put most of it on the labor rate, but carry some on the subs and materials also.. say (15%ovrhd+10%profit) for subs & matl's and then your labor rate to make up the rest.. in the end it should come out to what you would have figured anyway..with flexibility for the customer if they want changes less the couple of points for your reduced exposure
*Most homeowners don't understand cost+.Make sure you are both on the same page.Mikes comment on the subs and matls may not be undestood. "It was cost plus the profit, what's this overhead stuff???"I am not suggesting you tell the customer all your business details/practics. Just suggesting be on the same page on what you both understand. It may mean changing your pricing stratagy for this customer.BTW I think the customer is nuts on the cost + %, but that's another topic.
*bobl... there ain't no profit until the overhead is paid.. 15% + 10% is easy to sell... and it's the STANDARD, accepted by the insurance industry, when doing a workup...so.. which would you rather sell... 25% or ( 15 + 10 )?
*Mike no argument from me. I did not disagree with what you said Let me try again.John Q Public most likely has NO idea what a cost + contract really is or what overhead is. When John Q thinks cost + he may think what you paid for the material plus the profit not plus overhead plus the profit. He maybe thinking you're making a 25% profit on a $2.00 2x4 is ridiculize because he doesn't understand. He may have no idea what is considered standard in "this" business world. ("this" meaning the accepted practices in this type of endevor)My point was to be sure both parties are actually talking using words with the same meaning so there isn't a dispute later on. Far too easy to do when the two parties maybe coming from diverse "business" worlds, using the same words but having different meanings.BobL
*Another thing to think about, and agree to, is what information will be given to the customer, since it cost plus. Can be dangerous ground, too much or too little.regarding pricing this ment help http://www.sbaonline.sba.gov/library/pubs/fm-13.doc
*I think that cost plus is the last way to do business with a homeowner, for all the reasons Bobl gives. I was always under the impression that cost+ is used on a business to business level. -Ken
*Cost plus is stupid.near the stream telling it like it is.aj
*Stupid in what way? Too much headache, customer confusion, can't get deals done that way? I agree that this is not the ideal way to do business and not the way we usually work (hence the question), but we are doing it because the owner is convinced this is the way to go. Our structure would be all material and subcontracted costs (loan is his), excluding our direct supervision, plus a % for overhead and supervision, plus a profit markup. I agree that the split number seems easier to sell and attribute to the items to which they relate. However, what are reasonable rates? 10% is about right for profit, but is 15% just an example, or is this a structure you've actually sold?
*there are times when we use Cost Plus, like "Fast Track" or, when we get into complicated work with lots of unknowns, ..since 15% + 10% is an accepted standard by the insurance industry.. not because it has any basis in reality, we've used it since 1985..70% of our work is Fixed Fee.. and we prefer Fixed Fee.. but when the right circumstances come along we'll use Cost Plus.. we usually call it T&M.. under current conditions a typical T&M would be structured like this:(Labor at the rate of $45 an hour) +(materials & subs @ Cost +25%)we give itemized invoices... and credit for materials not used if they have salvage value to us.. if they don't we offer to leave them with the owner or remove themour labor includes all production, material procurement and supervision time...it does not include charges for billing and invoicing.We explain the ground rules, when the clock starts, coffee break in the AM, job clean up.. etc.
*Mike - Thanks. When you put it in those terms it's a little more straight forward- I'm only saying that breaking it down to the point of profit and overhead is likely more than a homeowner wants/should know/needs to know. Time and Materials should be an easy to understand by everyone. I've worked on that basis a lot just for the reasons you state: "complicated work with a lot of unknowns". In fact, the 'materials' were marked up 30%........If a client should balk at this structure, then maybe you don't need that job. Pricing as T&M is intended to protect you from hanging your ass out. Those kinds of jobs USUALLY have that liability written all over them. -Ken
*If I have no contract, then I am working from a handshake. And then what I do is guess estimate budgets before hand, then bill as I go along Time and Materials. eventually the customer will spend to their limit and let me finish out. No formal contract, no showing receipts or time logs or justifying hours worked, traveled, sitting, discussing, blah blah blah. Contracts have specs and set costs so they are really not T&M.near the stream working at present by handshake alone,aj
*T&M or cost plus are just diff ways of doing same thing.Most alll of my work is done this way but I do remodel/restoration work where there are many unknowns and variables. We estimate for a budget is all. I explain that if they want a firm price contract, I have to calculate the most it could possibly cost and add profit to that. T&M allows me to make a profit, do good work with out worrying about losing my butt, and offer customer a chance of saving money. On a new structure it is much easier to calculate costs and write a firm priced contract. The only reason I can imagine where you would want to do this deal is if it appears that this customer can't make up their mind and change orders will drive you crazy. I can't picture why the customer would want it. Sounds like he wants to be in control and pretend that he is the GC. That could be a warning of other problems. Or maybe he just has some idiot friend advising hium in the background.
*We do 60% of our business on a T and M basis with very few problems. We do it because the plans are usually too vague to give a fixed price. We mark up our materials very little (10%)but make up for this with our labor rate. This has never been questioned. The key to this arrangement is to have a realistic initial estimate and keeping track of changes in the scope of work as they occur and communicating this immediately to the owner. This is in lieu of change orders. Keep a running total with the owners so there are no surprises at the end of the job. If you go way over the initial estimate you will have a hard time collecting if only because the owner simply may not have the money. It is no harder than collecting if you go over a fixed price.
*Ya all might find this interesting from the MarkupAndProfit.com web site 22 REASONS WHY YOU SHOULD NEVER DO COST PLUS (C+) Or TIME & MATERIAL (T & M) Contracts Or BILLING For Construction Projects
*many of those reasons refer to documentation necessary for t&m billing.Documentation should always be done anyway."11. What happens when the Owner is to supply some of the materials and they forget to buy a certain item or don’t know what materials to bring to the job site? Who pays to go get the forgotten items? What happens if it takes the owner two or three days (or longer) to get the needed materials to the job site? What do you and your crews do in the meantime?"answer - if the customer is running the time up he pays for the time
*In my world T&M and Cost + are two differnet beasts. You are contractually "delivering" two differnt things. Although the end result sought is still the same. In T&M you are delivering labor hours and materials. In Cost + you are delivering an end product (new kitchen, new house etc). When it comes to Cost + there are lots of things that can follow the "+". Even in "fixed price" there can be variations.All of these variations require that both parties understand what is going on and the "game rules", often rather complex. the KISS principle is usually the best.
*bobl.. you make it sound that there is such a thing as absolute definitions... well .. there aren't... if there are, try to get 2 builders/architects/contractors to agree on it..cost plust&mcost plus fixed feefixed feecost plus with a guaranteed capand yada ,yada ,yada..give me the specs , make 'em as tight as you want, and i'll give you a contract constructed any way you want... all with the same end product...b but hey, whadda i no ?
*Why does the customer want to do Cost Plus? This is a pretty common thing in the commercial world so maybe you have a knowledgeable client. Could also mean that the client just wants you to build using his materials. You don't say so I'm not sure if this is a blessing or a problem.As for the percentage to use it really doesn't matter what the industry "standards" are. What you are interested in is what percentage you need to cover your overhead and make a profit. If you have done a good job in the past of accounting for all your costs this is no big deal. You just apply them to the job and calculate the percentage.I don't think it is a good idea to break out for the residential customer what part of the percentage is going for what. A fixed percentage is all that is needed.One thing is key though and that is what you agree on for a termination agreement. If the customer terminates early for whatever reason you are left with some costs that need to be covered. So, you need an early cancellation/liquidated damages agreement in the contract.T&M, Cost Plus, Fixed Fee are all doable if you have a good accounting system and know what your costs are.
*Mike, If there were absolute definitions we wouldn't need lawyers and contracts. Everyone doesn't have the same understanding on what the terms mean. Trying to explain what they all mean would take a long time, and then they would be changing before you were done. And if you cross industry cultures (can't think of a good set of words) you're back to square one. as you well know, what's the norm in one area, is not in another. Hence, KISS. Show me a contract and I'll show you something that both parties think they have agreed to the same thing and they haven't. The more complex/detailed the contract, the more areas for disaggrement. (If one party is intentionally trying to screw the other, then...oh boy.) You have a contract to protect youself because things happen. someone (think it was this thread) said his cost plus was called T&M.If you run into contractual problems, what you are delivering contractually (least in my world) are very different things. When things go well and everyone is happy at the end, then the contract type may not have mattered. In the best of worlds a handshake is all you need. But we both know that today, that won't do very often. If you are trying to mitigate risk for both parties there are lots of ways to do it, but the learning curve for both parties may be too long and have the possibility to add more problems then they may be worth. All the "whats" you are trying to accomplish go into determining contract types (you may think I'm telling you what you already know, but others may not so I'm saying it). Established and understood technigues are often times better than trying to use new, less understood technigues. My "listing" was only to hint at there being more than a couple ways to contract. The varibales are too many to my wanting to get into them in a post. But I did want folks to know there were others. Watching some of the posts on BT and JLC I just can't help myself but say something. Often too short. But I see complex questions looking for simple answers, when the real question probably hasn't been asked. Don't like to see folks go down paths that can lead to trouble that could be avoided. But the amount of information available on some posts has a thousand questions related to it, and a thousand assumptions behind them and the responses made.BobL
*We thought he was unusual asking for cost-plus, didn't trust us, etc. However, I think he just wants a fair shake on it and thinks this is the way to get it. He shouldn't have many CO's because his architect detailed finishes down to the nth degree. So we don't feel that we have much exposure anyway, he just wants this structure. Since we aren't hanging out, and we can make a similar margin, we're happy to do it, once we know how to price it.
*Tom,I'm really interested in this discussion, and glad you started it, because I just took on a cost-plus custom house, albeit under somewhat different circumstances.Heavy owner involvement, great deal of uncertainty about finishes, lots of changes to work in progress, and drawings that were pretty vague and not necessarily indicative of the design intent.No way I want to try to write that many change orders, nor would I appreciate receiving them.So, cost-plus seemed like a viable solution.As for the "plus" part, I'm still trying to figure out what's fair, and would sincerely appreciate candid observations based upon experience.I've determined that my overhead is about 12% to 15% of gross. That seems to be in keeping with industry standards.By overhead, I mean all of the stuff it takes to just keep a business running, i.e. those things that can't be charged to a job as a direct cost; general liability insurance, office expense, phones & utilities, rent, vehicle expenses, equipment maintenance, accountant, so on.So for me the question probably really comes down to, "Given the customer's assumption of risk, what constitutes a fair profit?"In light of the fact that the customer is of course privy to this information, the answer has to withstand pretty close scrutiny.Any ideas?Dave
*dave... ah'm only gonna say this about 20 more times... 15 + 10 for subs & matl's... then state a seperate rate for your labor..make sure your labor INCLUDES (rate + burden+ + some of your annual overhead + some of your annual profit ).... so in your initial estimeate... if the job will consume 8 months you have to recover 8/12 of your annual overhead + profit...also.. make sure administrative & supervision is INCLUDED..b but hey, whadda i no ?
*15 + 10 works well
*Mike,OK, I think I'm starting to get it.If it starts looking like I've missed anything, can I ask you to go over that again? Recently I was talking with an architect who I supposed I'd like to work with. She expressed some concern about contractor fees, and wondered if there weren't some way to get more control over construction costs (read that: More money for the architect).I'm OK with that. In theory, anyway.I told her that one option would be cost-plus. In this way she had total control over the job, and there were no hidden costs. She seemed agreeable to the idea until I told her I wanted direct cost plus 27% -- that being 15% overhead, 12% profit.I thought she was going to choke.Even after explaining to her that 15% was WELL within industry standards for overhead (see Robert Morris & Associates balance sheet analysis), and I couldn't see any reason why I would put myself in this position for much less than 12%, she thought this was simply outrageous.Somehow, I didn't think giving her back 2% would make much difference.It really all did seem reasonable to me, as did your original advice.So as you can see, I don't doubt you a bit. On the other hand, when I tell potential clients how this works they always look a little stunned.Oddly enough, another architect has proposed a design/build partnership as well. When I explained this same deal to him (he now being on the receiving end, i.e. we bill the clients direct cost plus 15% & 10%), he thought it was perfectly reasonable.Go figure.Anyway, as simple as it all seems, it would appear that I have some kind of problem explaining this to potential clients.I don't know if they don't believe our overhead could be 15% (probably the case), or if 10% seems like an unreasonable profit.Or maybe the sheer size of these numbers (25% of a couple hundred thousand, however reasonable, is still a lot of money).Do you suppose there's any argument for economies of scale, i.e. once the job goes over some amount, say $300,000 the percentages change?
*Dave,The NAHB and a guy who is a construction trades instructor at a local college here in Denver (and who used to be a GC up in the mountains - think Vail/Aspen) both said 25% and more, but without breaking it out. We were leery of that because it seemed like such a big nut to crack and they didn't have as many specifics as you do here. However, I'm beginning to see the light (thanks Mike). First of all, a 25% add-on to cost translates into a 20% gross margin ($25 profit for each $125 in revenue), which is perfectly reasonable, even a little shy, on a "with-lot" sale. Additionally, the "with-lot" sale includes some markup on the lot itself and financing costs, so, although my margin is acceptable, my net in absolute dollars is less than if I spent my time on one of my own lots. I'm not getting that since this is his own lot, but I'm at much less risk than if I were trying to sell my own lot and had the construction loan liability. In fact, we just had a pre-sale blow out so we're now trying to sell yet another spec into a somewhat cooled market. At least on this deal, since it's his lot, he's probably not going anywhere.I'll add that another builder we know suggested lowering the percentage somewhat and putting a bigger amount in for supervision. He also said to make it a fixed amount per month for two reasons. First, he said it will flow in at a flat rate just like it gets paidout to the super. Second, but more importantly, he said that since it's fixed, it gets the client on the hook for delays he may cause with changes, indecision, etc. and provides a bit of a "stick" to keep the job moving. This way we're not spending all sorts of time on issues, changes, etc. without getting any income to pay for the costs that continue to mount.Finally, one thing I think deserves some additional thinking is this idea of pricing according to cost structure. While we do need to cover overhead to make a profit, and that's the name of the game, the market is the market when it comes to revenue. It's up to each of us to manage our costs to turn a profit. It can become a slippery slope to price based on overhead because you may price too high, get fewer jobs to pay for overhead, charge more on subsequent bids to cover the overhead, and so on until you've priced yourself right out of business. Instead, we focus on our "contribution margin", which is all the variable revenue less the variable expenses, expressed as a percentage of the revenue. Each one of the cost items is compared to a budgeted percentage/margin to track the performance of the job compared to plan on a percentage basis.The result is that each job provides, or "contributes" (hence the name) money to pay for our overhead. It is our job to control overhead to turn a profit. I will admit that we have a target range for that overhead percentage. However, in lean years we either reduce overhead or lose profit, but we can't set prices and tell our potential clients we are so high "because I have overhead to cover". In good years we make more and soft years we make less.Sorry for the monologue, but I've seen builders go down on that logic. Track your margins, know your costs, but the bottom line is that the market will only pay so much for your product.
*well... i hope i made it clear that my favorite is fixed fee contracting.. but over the years we've done an awful lot of Cost Plus.. and eventually it evolved into what i described above.. we did build a great project on a (Cost Plus fixed fee )... made some great friends.. but no money...the 8 month job turned into 12.. and the labor rate didn't cover everything it had to... so.. Dave:the architect who was agast at the 27% sounded a little inexperienced...the good ones in the NYC area are getting 15% just for architectural services.. never mind construction... the other thing is... these rates almost never get to the bottom line.. somehow, at the end of the year, it all sorta vaporizes... hah, hah, hah...
*You guys rock.Mike, I'm wishing we got to talk more when we met at JLC Live in Providence. My loss.Tom, I'm going to be thinking about your most recent post for a few days, and will probably revise my cost-plus contract as a result. Thank you.Not that long ago I'd have been trying to get you to write a little more and sign a copyright agreement for another well-know construction magazine. If you guys are willing, I'd like to keep going with this thread. I've got two more clients who want to go cost-plus, and a bunch of details to hammer out before I ever sign one of these contracts again. (Hmm, what's the emoticon for that one?)Dave
*Dave- Your percentages are fine but 2% does make a difference. It will show the owner that you are willing to give a little. This can work in your favor or against you depending on the owner. If you think it might work against you, don't do a cost plus contract with them.I think that you may be misjudging the architect's motives. She probably doesn't make enough money and is not getting 15% of the cost of construction. If she was, she wouldn't care if you cost a little more, she'd be getting her cut. No, she is an artiste and is realizing now that her beautiful drawings are never going to be built in the budget that she was given. How many times have we seen this?
*i No way I want to try to write that many change orders, nor would I appreciate receiving themHope the conclusion that you don't keep good notes of everything is wrong. You still have to be sure there is a good understanding.
*bobl.. when i met dave he was assistant editor at JLC... he's a pretty buttoned down guy and i bet he keeps real good notes
*Mike,The "fun" part of posting is guessing what the posters may or may not due and then deciding whether to post something. Hate to post what may be routine to me, but then, hate to not post because if it isn't routine for others and then they get in trouble.
*Mike, that's pretty perceptive. You're right.I keep a site log that's sufficiently detailed and accurate to know what everyone on the crew did on any given day including subs, deliveries, and visitors, maintain job costs ledgers within a fraction of a percent, and I don't write any change orders that I wouldn't feel good about receiving if I were the customer.What I was referring to is that where there is a great deal of uncertainty about the finished product (I get a steady stream of clients who want to "make it up as they go along"),it seems fair that the customer should get what they want and I should get paid for providing that.It's a very expensive way to build.There's also no way I can predict what this is going to cost if I don't know what it's going to look like and neither does anybody else.Cost-plus seems like a fair way to deal with this. If nothing else, it avoids making the client feel like they're being beaten to death with the changeorder pad. They get what they wanted at a price we've agreed upon ahead of time, and there's no hidden costs.Hey, wait a minute!How did someone who had hair halfway down his back and no verifiable address just a few years ago end up "buttoned-down?" As Ron would say, "I resemble that remark!"
*Schelling,I think you might be right. Too bad, because I've sen her work and she's really good.That, coupled with the fact that the RFP came complete with AIA contract documents was just enough for me to lose interest.I don't want to hijack this thread at all, maybe I should start a different one on AIA contracts?
*AIA..docs: it took me a couple years before i figgered out i didn't have to sign them.. and i could cross out anything i didn't like and any builder who signed them as is, had just handed his ass to the architect....seems like they were always part of the original bid package , but they never made it to contract...
*I guess Im a builder that has turned investor. AS Ed would say ;its not like that in Dallas.Costs in the south are really tight. So many of the builders are carpenters. There are still plenty that will build you a house by the hour. Sorry to dump water on the floor. Im proud of the builders here that are holding up the prices. We need price setters,trend setters and above all pioneers in the field. My hats off to you guys. The reason I have turned investor is because we are ruled here by the apprasior.2500 sg ft is worth so much a sq ft. period. I dont care who built it and normally where it is at. Yes there is an extra for top grade homes, but it isn't enough to make them that way. Then there are the banks that will loan only a percentage of the appraised value. Also;the homeowner to be has internet access. Im sittng in Arkansas, and in 15 minutes I can tell you what the houses are selling for in your town if it has an mls. Buyers have become street smart by internet access. Believe it. It has come to pass. What is working now might not work in the near future.You may set your costs where ever you like. But we are ruled by all the people and judged daily.What I would like to know is how you deal with these costs when the market doesnt bear it. Why would anyone want you to build a 2000 sg ft house when they can find a 2500 sg ft on the internet cheaper???? Or is this the case ????? In no way have I ment to offend any one, but noone has set the reins on the mare since this posts has started.happy trails , Tim
*tim... don't build new.. your perception is my perception.. new const. is a commodity.. and commodity is price inelastic...now... when new houses reach a certain price level and the most important thing is the land they are sitting on.. then remodeling will suit the existing homeowner and get the good builder the price he needs...b but hey, whadda i no ?
*Cost+ is stupid...for the customer if they are uneducated, don't understand the process, don't know what risk they are exposing them selves to, specify less then the best materials, presume the job is a clean slap shot.
*Bobl, doesn't your post (#2) in this thread answer your Q in that other post you started about "Home" Vs "Business?
*Rich, Not sure which is my post number 2. The one you replied to (numbered 2 on my screen), or my second post. They are related. But it doesn't answer it (my post). I posted the other in the tavern because I didn't want to hyjack this one on a, to me, related topic. When I do something for myself, (home or business), in the particuler curcumstances, I am a business person.This thread, the line estimate thread, and the thread on a mistake in the bid are related to my post in the tavern.I tried to make my posts on this thread releatd to what I do. I like to call myself a procurer, but my bosses don't like that. Sometimes I feel like a proctologist.