Hello everyone,
I’ve posted a few times in the past, but usually just listen in. I’ve recently started my own business as a GC. I am currently building a small custom home( 2200 feet) on a T&M basis. A couple of weeks ago I was aproached by a prospective client who was referred to me by a past client. They have bought and paid for a nice piece of land (115K) and they have had a local designer draw up a draft so they could talk to a few builders. The House is just under 5,000 feet with 3400 finished and 1450 unfinished basement. I’ve met with them a couple of times and offered some design suggestions (moving the massive three car garage doors from the front of the house around to the side, and a timber frame entry). They have had time to talk with two other builders and the last time we talked they came out and told me they wanted me to build the house as long as my numbers came in close to their budget which is around 450K. If you are thinking those numbers seem a little low I should explain that they are not looking for anything super custom just nice, new, and comfortable.
The travel time between the land and my home is 3 to 4 minutes, just one of the reasons I would really like to get this job. They just called me tonight to tell me that the designer would be completing the plans next week including both of the changes I suggested. Now for the questions. The HO asked me if I would prefer doing a bid or T&M, Obviously T&M would be safer, but in my experience T&M jobs always seem to end up with the client wondering why things were so expensive. also what isthe best way to go about financing? I’m thinking I will just let the HO get a consruction loan. Well this post is getting way too long but appreciate all advise. Thanks.
WillowRidge Construction
Replies
Definately let the HO get a construction loan, never work with your own money[ or money that you borrow].
T&M is always preferable, A contract does not insulate you from HO disatisfaction.
Sunny, you don't want to get into a bidding war and the margin is so small that you'll end up working free unless you go with a fixed fee for the build.
If the construction costs are going to be 300k, I'd be seeking at least 20%. You'd be earning every penny of that 60k. That would only include supervising, no skilled or labor.
blue
Just because you can, doesn't mean you should!
Warning! Be cautious when taking any framing advice from me. There are some in here who think I'm a hackmeister...they might be right! Of course, they might be wrong too!
So... sounds like they've told you that their primary concern is budget. That's a major clue as to what will be important to them during the job. Are you able to generate a cost estimate for the project that's accurate to within about 5%? If you're going to work for folks who are highly cost sensitive, then your estimating skills and ability to buy materials and subcontract work for fixed prices will be the most important thing.
A T&M contract will insulate you from financial shock during the job, as long as the owners pay their bills and you do not extend your own cash and credit into the job. A fixed price contract will expose you to financial disaster if costs go over budget, but you may be able to make a larger profit than with T&M. In either case, it may be hard for the construction lender to meet your cash-flow needs during the job--if a loan is involved, find out exactly what it takes to get draws, and when they will make them. Does the owner have more cash to get things rolling?
The professionial way to approach this is for you to take their completed plans, sit down with the clients and the plans, for as many meetings as it takes, and agree on specifications and selections of products and finishes.
Have them prepare for the "product selection and finishes" process by doing their own research in stores, home centers, and on the web. They have to be able to meet with you and have enough specific information for you to prepare the cost budget.
I know a couple guys that do higher end cost plus new construction, and they prepare extremely detailed packages for their clients, like I have described here, with line items for things like "cabinet door and drawer pulls in master bath vanity," for example. The prepared end product is a bound folder of spreadsheet pages. Every labor and material item is identified, and numbers given.
In order for them to get bank financing, they will need a well-prepared construction contract proposal, and the contract documents will include the drawings (site plan included), your specifications, and the cost budget, including either your fixed fee or your OH & P presentation.
Make sure that your contract lays out the specifics of insurance. The clients generally will be providing the builders risk, but you will be doing all required liability and workers comp. The lender will need to see these specifics.
The prepared spreadsheet that is the budget model is used throughout the build process to track actual costs versus budget estimates, and most importantly, to track change orders.
What Gene said.
There are no shortcuts, and an extra effort to identify specifications and costs now will make life SO much easier later.
Heck If I know....
With T&M you will get paid for working there in whatever capacity you are proficient at as well as giving direction to the subs
With a fixed contract you will make a set percentage amount for your GC skills, then you can handle any of those line item tasks yourself as you have time for.
Not knowing what your trade skills are (if you have any), I would take the fixed price and handle things like taping, painting, trim, decks, landscaping. Try to minimize the payouts.
In just about any situation ...you want to work smart not hard and UOPM
(Use other peoples money).
Its just good biz bro
Be well
a...
The secret of Zen in two words is, "Not always so"!
When we meet, we say, Namaste'..it means..
Thanks for the feedback everyone.
sunny.. if they are concerned about budget.. then i would not want to do T&M
you can't give them a budget with t&m
i'd tell them you want to prepare a Proposal for a Fixed Price contract.. and you want $5000 to prepare the Proposal.
half down and balance when you give them the Proposal..
then i'd schedule 3 or 4 meetings with them to iron out the specs..
anything that isn't spec'd will become an ALLOWANCE item..
then i'd do my takeoffs , solicit my subs for their prices, add in the ALLOWANCES .. figure my overhead and profit..and give them the Proposal..
if it's a budget breaker.. i'd have Plan B & plan C.. and do value engineering to bring one of those plans in for their budget..
if you take the path most will take.. you will go T & M.. .. you will set your rate too low... or not..
then the T will start to add up.. and the M will start to add up.. they will want to know how much it's going to cost to finish.. and you won't be able to tell them..
pretty soon , the whole thing will be in the crapper..
T&M sucks... spend the time and money to figure the job for a Fixed Price..
spend your time and their money
Mike Smith Rhode Island : Design / Build / Repair / Restore
I use to have to do planing and estimating when I was in the Seabees for asphalt jobs. Some of what I learned there can be used here as well.
The one biggest thing that a lot of contractors leave out of there estimation is the consumable items. ie: fuel for the backhoe that digs out the footers or basement, cartridges for the Hilti guns. These items are more or less at a fixed cost for a period of time. I always added 10% at this time. If any or all of that 10% is not used you can either return it back to the customer or keep it as profit.
Most remember to charge for the man hours but few if any charge for there equipment hours. ie: the sub that is putting in the footers with a back hoe will charge for the use of that equipment. A framer may think that it only takes a few seconds to cut a 2 X 6 to make a header, so he doesn't charge for the use of the table saw. When you have 16 windows and 8 doors to put in those seconds can add up. And don't for get the jack studs that need to be cut to help hold up those headers. Charging for equipment hours helps to pay for new equipment when needed and pay for the equipment maintenance.
I am sure that some of these BTers are shaking there heads and saying something like "Yep I have been known to forget things like that and have ended up paying for it out of MY pocket". It all goes back to that OPM (other peoples money). Make them pay for your business not you.
Dane
I will always be a beginner as I am always learning.
All of this is good advise. I've decided to do a fixed price bid and see how things shake out. I will take the time to put accurate numbers together( I'm guessing it will take a few weeks) and if they are too high something will have to change. Is it worth doing a job just for the marketing? I mean after all overhead and a fat salary and a few percent figured in for overages, Is it really a terrible thing to not make that extra 50,000 profit for six months of work? The jobsite is located on a beautiful birch covered lot that is very visible from a small road that leads to the largest park in the city, and is frequented by countless yuppies on their way to walk their 2,000 dollar poodles. This is one reason I wanted to add the two story stone, log, and timberframe entry(which by the way I have the skills and resources to do myself, at a fraction of the cost of having someone else do it) it will really catch peoples eye as they drive, walk, or bycicle past. Put up a nice company sign and it sounds like the best marketing I could ask for. I may be wrong but I'm sure you guys have some opinions. Thanks. Josh
WillowRidge Construction
reviving the lost art of crafstmanship
"Is it worth doing a job just for the marketing?"NO WAY. You gotta be crazy (or just pulling our chain) for even asking that one. One thing I learned long ago: doing a project for no profit IS good advertising...for getting jobs with no profit!
If the HO doesn't want the T&M or thinks your bid is too high, then meet them half way. Give them a fixed price for labor and they pay for materials. Just a suggestion. Good luck. Oh yea, marketing is always good especially if you are just getting going, but that is the most important time to make some money. Got to get money in the bank to put food on the table!
Gene Davis is right: spec right down to the cabinet pulls.
Mike Smith is right. T&M is a recipe for disaster on a custom home. In fact, I doubt if a bank is going to write a new construction loan on an open-ended T&M contract unless the HO puts some serious cash in escrow.
Here's some more things to mull over:
If you haven't done so already, expect the bank to require a business history and financials on you.
Make sure the plans are permit ready before you commit yourself. As codes change, or if you are faced with some engineering issues like extra shear walls, seismic, portal walls, backfilled walls, etc., the extra costs can eat you up.
Let your liability ins. carrier know what you're up to; larger projects and higher subcontractor costs mean much higher premiums. Find out how much higher so you can factor that into your overhead.
Make sure an experienced, meticulous estimator does your materials take-offs. (and I always double check them myself).
Put an escalation clause in your contract to cover increase material prices when you get deliveries beyond the maturity date of your yard quotes. Those quotes are usually good for 30 to 60 days and on fairly large house, unless you have one of those huge slam-bang crews, you're going to be having doors and windows delivered downstream away (unless there is a good storage facility on site).
Make sure all your subs are licensed and insured and have W/C. Get their Fed Tax I.D.'s up front so you don't have to chase them down months later as you scramble to get your 1099's out.
And make sure your contract states that all subs go through YOU to the HO. You're the project manager and, while the plumber may have to sit down with the HO to identify shower valve styles, the plumber should price them to YOU and you provide the change order to the HO.
Keep the HO in the loop and stress free. Part of your job is to make the building experience pleasant for them even though you may sleep a little more poorly at times.
Keep you cell phone charged.
Have fun.
Just a note on building so close to home- it is a double edged sword, these people will ultimately also be your neighbours. if things go well, it will be incredibly good advertising and satisfying. if it goes bad, it will go real bad and not go away. Given the proximity, a fixed price is safer assuming 1- you can take draws that keep the balance in your favour,ie, a nice fat deposit and lots of small progress draws instead of a few big ones and 2-you can estimate accurately. that way if it starts to smell and you need to bail you can without too much pain. I would also ask them what they prefer FP or t+m. A large deposit is also a litmus test of sorts that will give you a read on them and how they are willing to part with money, esp. to you.
i liked the comment about poor sleep and the one about cell phone charging, its that time of year once again.
Ian