I am getting involved with building a large(for this area) home of about 3700-4000 square feet. The HO is my realtor for a successful developement and he wants to make the home into a sort of centerpiece for the project. This home will include things such as an indoor pool with several fireplaces and that is just the beginning. In our area most custom homebuilding is done on the traditional bid system with an army of change orders following. I would like to build the home on a cost plus contract and the HO has indicated that they had a good experience doing this in NJ.We are in south central PA, by the way. What kinds of experiences have you had with this type of contract. The HO said in Joisey, the GC charged a flat management fee and then a % on everything else. Of course nothing was said to match numbers to either of these things. I need to build the house simply for the reason that it doesn’t look too good if our realtor uses another builder in our developement. Any and all advice would be appreciated. I just want to make a fair profit and not get hung out to dry.
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You say, "I am getting involved with building . . . , " and then later say, "In our area most custom homebuilding is done on the traditional bid system . . ."
Are you being asked to GC this showpiece home?
Are you in the business of building custom homes? If not, what is your expected "involvement" in this project?
Doing work on a cost-plus-a percentage or on a cost-plus-a-fee basis is pretty straightforward, but I haven't heard of your "Joisey" method of combining both.
To clarify, I am asked to be the GC on the job. This is in a development that all of my work is in anyway. I spend all of my working day on several different projects in the same development. I have no employees, I work solely with subs, very good ones I might add. Most of my work over the last six years has been building semi-custom duplexes in this dev. The other side of the dev. is single family lots which my father has been building on. For all of our regular projects, we own the lot and the building until the day of settlement, the HO has ZERO leverage, they can walk away at any time. Things are selling so hot right now, we could put the home on the market and sell it quickly. We have never reached this situation with an HO, but its nice being able to sleep knowing that they can't hold back the last 7K because a door is rubbing. Anyway, my realtor owns his lot, so I will be working under a more traditional arrangement. I know that this home will require a lot of my time and the wife is known to want things done her way, no matter what. The job nicely dovetails with a small slow period while we get construction of another street done this winter. I will not be offended if anyone wants to offer some numbers. I have been thinking about 10 -13% without any management fee, but I am trying to gather some input from others, the problem is this is not a common practice(that I know of) for this area. Thanks for the replies.
It sounds like you have a developer, that happens to also have a real estate broker's license, interested in you as the builder of his model home. The home is expected to be the draw for this new subdivision of single family homes. The developer's wife is, in effect, the interior designer and decorator. She is exacting and demanding.
Right so far?
Has the wife seen and signed off on the type of work and level of finish for which your subs are capable?
Are your subs captive to you, i.e., they are principally working for only you and your father?
Do you know the source of funding for the project?
Does the developer have any relationships with any other GCs in the area?
Your competition might come from two directions. If your developer balks at making a deal with you, he might seek another GC, or decide to GC it himself, maybe using your subs.
You need to know what other GCs in your area are charging as a percentage or fee or combination of the two, on cost plus work for design-build or custom work, in order to position yourself.
Where I am it ranges from a flat 15 percent to 10 percent OH and then 10 percent profit. That works out to 21.1 percent. No one is doing fees.
My father and I own the development in which the home would be built. We are the developers and builders in this project. The original owner of the property ( a farmer) tried doing a bit of dev. himself and quickly tired of it. We now have purchased all the remaining residential ground and will have exclusive rights to sell to whom we wish. My realtor bought his lot from the original owner and simply wants to build a personal home in the development, on a prime lot. This is not a job that I am bidding on, they have told me that they would like me to build the home. They have seen our level of work because they have been selling our product over the last year. I have no competition for this job, I do not typically bid on homes at all, I tell the prospective HO up front, I will not be the cheapest and if money is the deciding factor, go elsewhere. Mostly, I am looking for help on how to treat both of us fairly on a cost plus project, as I have no experience in this area.
Mapleboy, if you have been building house in that area and marketing them, then you already know what markup you have been able to achieve. That markup would be your starting point.
If you are satified with your current markup, then that would be the flat fee that you would charge. You could discount slightly, because you are assuming less risk. Remember, you are in the drivers seat...until you sign the contract.
The most important rule in negotiations is to gather as much info as possible. Information is power.
There is one truism in negotiating that you should always remember: whoever makes the first offer loses.
If you can get the realtor to tell you how much she is expecting to pay you, ontop of all direct costs, then you can negotiate up and make this a win-win situation. It's obvious that they want you...give them what they want!
blueIf you want to read a fancy personal signature... go read someone else's post.
10-13% on the total job? Subs, materials, site developement, permit fees, everything?
I'd ask them what they thought fair numbers were for both the management fee and the mark up. I'd ponder what they said and get back to them with what I thought was fair (might be what they said, might not).
The three most important things to know when negotiating -
1. What is the best outcome I can hope for? What would put a smile on my face for the duration of the project?
2. What is the lowest number I'll settle on? What can I do the work for and still make what I consider a fair profit?
3. What's in it for the other party to keep the needle closer to my high outcome than my low?
That's not completely unusual, even if it might be regional. There's at least one design build outfit here that does strictly cost plus on residential new construction, and do pretty much what you said. For the project, there is one flat management fee, and there is a markup on everything else.
I don't know what the numbers they use are, and I don't think I'd want to know. I'd have to play my own game. Decide what I want to make on the job based on the time expenditure it's going to involve, and charge that.
The times I've done that on remodel work it's a little different since I'm going to be on site a good deal of the time anyway, ergo, supervision doesn't pull me away from somewhere else. That allows me to use numbers that are probably on the lean side if all you were looking at were percentages. What I'm saying is - if you're going to be there performing some of the tasks, and paying yourself for same, that could play in to your figuring for how much time gets consumed in supervision. Five minute deals actually take five minutes, not an hour with the drive time.
"If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain
Dear Mapleboy,
Different people call construction methods differently. What really matters is the contract you are going to use. Here in Canada the norm for a Stipulated Price contract is the CCDC-2, Construction Management is Contract CCA-5, etc etc. It is imperative that both sides understand the contract.
Just bear in mind that Cost Plus and Construction Management are different concepts. Again, read and understand those applicable contracts to get a good understanding of how the mechanisms work. Using these official coontracts is a good idea as they have been tested in the courts and they really do cover the areas that need covering.
Hoping that helps
Alma Consulting Ltd. Project Management - Construction Consulting