I’m interested in how the contractors here structure their contracts.
We are mostly fixed cost with allowances for items such as flooring, light fixtures, etc.
Very Small projects are time and material
Never used a cost plus contract
I’d like to try to keep this more of a poll for now rather then the merits of each method. I know it won’t happen, but hey, let’s give it a try.
Replies
I've been working on the Construction Management/Owners Rep./Contract Admin. for the last quite a while. I've typically been doing:
T&M on very small projects (<$50,000)
Fixed Cost on Med. Projects ($50,000-$750,000)
and Cost Plus with a GMP on larger projects ($750,000-$4million)
Rob,How much do you charge for CM on commercial projects in the $1m to $3m range? What hours do you bill for and what hours are considered overhead?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Since the replies so far have been all over the board, how about some discussion of what a GMP really is, and then we can move on to hard bid......
As far as I know, "GMP" stands for "Good Manufacturing Practice." I think a few of the posters are having a bout of dyslexia and really mean "GPM," or "Gross Profit Margin."-T
How about guaranteed maximum price, aka not to exceed price..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Not to Exceed is what I call it.
I'm not as funny as I think I am
In so far as contract language and in the context used I would read that as "Guaranteed Maximum Price", sometimes referred to as " Not to Exceed".
They can't get your Goat if you don't tell them where it is hidden.
As mentioned by other posters GMP is Guaranteed Maximum Price. A typical GMP includes general conditions + good estimates if not bids for each division + profit and overhead + contingency(s). Depending on the contract there are lots of things that happen if the project comes in under budget. Typically the difference is split between the owner and the GC in a contractually arranged manner.
Also GMP is only good for the bid plans, and only as good as the bid plans. Changes in conditions, changes in scope, changes in schedule not dictated by the GC all result in change orders and increases in the GMP.
Rob
I do the same....fixed cost for the majority of my projects and T&M for the little ones with many possible variables.
'Course....sometimes, I might be better off throwing a dart into a chart filled with random numbers.
J. D. Reynolds
Home Improvements
Pp, Qq
Same as you. Almost all are fixed cost with a few small jobs T&M. DanT
Fixed price with allowances for 95% of projects
T&M for those can you get it done projects
Bruce
Almost all my work is Cost/plus.
Give spread bid on estimated costs to do the job including the percentage.
example: Kitchen Remodel-Total job cost with specifications as listed. $33-38,000.00
small jobs- $ 7-800.00
repairs-usually no estimate given.
Total volume 100-150,000.00A Great Place for Information, Comraderie, and a Sucker Punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
Calvin,
Could you elaborate on your spread bid a little more. Why $33-38k etc...It kind of sounds ball parkish. Are you putting in a not to exceed clause with allowances? Is this all cost plus here that you are talking about.I have never bid cost plus before. I like the spread scenario.
I can't speak for Calvin but I'll comment on the spread we use on T&M jobs.
I have one job going now T&M with 40-48 Hours of labor and materials between 375-450.00
We do that partly to protect ourselves and partly to help show the customer it's a variable contract.
To come up with the low number I take what I think it's going to take and add about 10% or so. The higher number adds another littler bit. I'd much rather go to someone and tell them we came in under or within the range then over it. The range gives me a little room to stay within their expectations and not have them asking why it cost more then I said it would.
Most of the time we're right in the range sometimes we are higher sometimes we are lower.
I never put a GMP on a T&M job, if I could figure out how long or how much in the first place it would simply be a fixed price.
CAGIV,
What markup do you add to materials on t&m?
k
25%
Realize jeb that all my work is referral. Many new customers, but a substantial list of former clients.
The spread bid is I suppose what you might call a ballpark. However, it is not a guess. It is an estimate of costs for the job. Best case scenario to max. cost as I see it based on the job description. If I was asked to give a firm price, it would be the high number.
My regulars like it and to them it has a track record. I very rarely exceed the high number and then it usually is a result of the "couldyas" or "while your here's".
The referrals are offered the firm price or the spread. Their choice. I also lay out the payment schedule. With the repeats I don't have a problem with cash flow. The new ones need some education.
The numbers I used in the previous post I didn't even think about but I suppose the spread amounts to 10-15 percent.
I will do a not to exceed, but I'm not asked to very often. Allowances are too ficticious for me. At the time of estimate writeup I want to know what kind of sink/faucet/etc. We have already decided on the price range as I offer the customer my price on all material. Fixture costs are given to them by my supplier so they know that faucet is 600, not 79.95.
All the costs are listed and then the markup is added on. I take this price and then go up to the high number.
There's very minimal additions to the base number. I've already figured money in for those unseen things others seem to make their money on. Now remember, these are repeat or current customers. They are my customer to lose. Not often do I bid "against" someone else. This wouldn't work with price shoppers.
And I have no doubt it won't work for most anybody else. But after 35 yrs I'd be out of business if it didn't work for me.
Hope that clarifies it for you.
A Great Place for Information, Comraderie, and a Sucker Punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
Edited 3/20/2008 8:38 pm ET by calvin
Calvin, You did shed some light on it for me. I can see cost plus becoming the new T&M. I like the idea for customers who have an understanding of what it takes to do business.I have probably bid similar to the cost plus with out actually giving myself the plus margin. I know I have invoiced that way.I've allot to learn.
Well, to me the plus is the profit. The other costs of doing business are factored into the hourly rate. I markup the material and the subs and me.
If I am presenting a firm bid, I do the same but it is only shown as one number.
We all have something to learn man, no body knows it all.A Great Place for Information, Comraderie, and a Sucker Punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
jebadia..
i've never seen a difference between T&M or Cost Plus
to me they are the same contract
what am i missing ?Mike Smith Rhode Island : Design / Build / Repair / Restore
My main artery I have here ,right now, is straight T&M for the most part..I am onsite and just tag my time. I guess I am acting as Pm to a HO /contractor.
Shop work I run as per ..such as a bookcase to be fabbed and installed..not to exceed 3k. Custom anything is billed shop rate and mats as best as I can est. and come up with a number that I feel will work for both of us.
Spheramid Enterprises Architectural Woodworks
"Success is not spontaneous combustion, you have to set yourself on Fire"
I charge time and materials (at my cost), with no markup.
I charge for every hour I work, including design & planning, ordering and delivering materials, consulting with client, supervising subcontractors, and hands-on work.
I charge what I believe to be a fair hourly wage and am philosophically opposed to the idea of profit, which is unearned income.
Solar & Super-Insulated Healthy Homes
"...profit, which is unearned income."HUH?! Bob's next test date: 12/10/07
Fixed Price. Allowances where necessary. Bob's next test date: 12/10/07
"...profit, which is unearned income."
HUH?!
Would you care to elaborate on "HUH"?
Profit is the difference between income and expense.
If you're running a business, you have fixed costs which need to be recovered.
Then you have to recover costs for materials consumed in a job.
What you earn is whatever wage you set for your time.
Any income beyond those three is profit: unearned income, gravy, theft (take your pick).
Riversong HouseWright
Design * * Build * * Renovate * * ConsultSolar & Super-Insulated Healthy Homes
Any income beyond those three is profit: unearned income, gravy, theft (take your pick).
so, which of these three pays for the computer and BT subscriptions, none of
which, a man of your caliber needs to do his job well. You can call all that extra
cash you're taking home at the end of the day whatever you want, whatever
extra you walk away with is profit
It sounds like theft to me too! Bob's next test date: 12/10/07
which of these three pays for the computer and BT subscriptions
If you believe those are necessary to your business, then they become part of the fixed costs of doing business.
If they are things you personally choose to spend money on, then they come out of your wages, as do all your other personal expenses.
Riversong HouseWright
Design * * Build * * Renovate * * ConsultSolar & Super-Insulated Healthy Homes
I was with you till you said you were opposed to profit. what happens when you take a loss? what customer is philisophically opposedto leaving you short in the end ? what about service calls,do you pay for them out of overhead, profit, or bill the customers? I'm just being devil's advocate here cause truth is profitis earned by using your experience and for carrying risk. you need profit to counter the dilemas that arise from time to time."it aint the work I mind,
It's the feeling of falling further behind."Bozini Latinihttp://www.ingrainedwoodworking.com
I was with you till you said you were opposed to profit. what happens when you take a loss?
I've never taken a loss because I don't view work as a form of gambling, which is what all insurance is.
As I indicated, I charge for every hour of my time. On big jobs, I also bill weekly, so the greatest risk I might incur is one week's output. For small jobs, I get a 50% deposit up front to cover all material costs, so the only potential risk is for my labor and not for out-of-pocket expenses.
I also include a mediation clause "in the event of irreconcilable differences" in every MOU, though I've never had to invoke it - in part because I choose my clients carefully and take on work only with those with whom I feel comfortable.
As for warrantee work, because I don't mark up materials (and, in fact, pass on any discount I get from suppliers), my warrantee covers only my time while the customer pays for materials.
I find this a much more straightforward economic relationship. I get paid exactly for what I do, no more and no less. I don't gamble on winning or losing, and neither does the customer. Obviously, I have to come in close to my estimate or I don't get the next job. But every estimate states that "unexpected complications, adverse weather, or changes in work specifications might inflate the cost."
Riversong HouseWright
Design * * Build * * Renovate * * ConsultSolar & Super-Insulated Healthy Homes
Edited 3/21/2008 11:13 am ET by Riversong
You are a breath of fresh air on this discussion. Thank you.As for the concept of risk. Risk assumes an unknown outcome. I live in Tucson, Arizona. Currently, the University of Arizona, located here in Tucson, has a major remodeling of one of the campus buildings. There is no contractor for this project. The party in charge is called the construction manager at risk ( the term contractor has a specific legal meaning so he cannot be referred to as the contractor ). The contract of the construction manager at risk goes like this: He is paid a fee to manage the job similar to a contractor. The University has a cap on what it will pay on top of the fee. The cap is $21,000,000.00. If the costs exceed that amount, the construction manager at risk must pay the difference. On the other hand, if the costs fall below $21,000,000.00, the CM at risk gets 25% of the savings down to $17,000,000.00. Thus the maximum 25% bonus is $1,000,000.00 if the costs come in at $17,000,000.00 or less.Now for the risk. The CM at risk must put everything out to bid and the bidders must be informed that he is at risk. He is free to choose any bidders he desires but there is no negotiation. The risk is the unknown bids. And those bidders may bid everything at cost plus, whether it be cost plus fixed fee or cost plus % of costs. Furthermore, those doing cost plus are under no obligation to control costs. Those bidders would be similar to carpentry contractors, plumbing contractors and so forth. If those bidders similar to carpentry contractors, plumbing contractors and so forth are bidding at a fixed price, the price would have to include the exact amount of the fixed price which is theirs and the exact amounts which would be going to any person, firm or corporation furnishing labor and the exact amounts which would be going to any person , firm or corporation furnishing material. Many readers of breaktime also read JLC ( journal of light construction ). As such, they know that Quenda Behler Story is an attorney who writes a legal column for the magazine. Ms. Story has stated in the past that the property owner pays precisely the same amount for a fixed price contract or a cost plus contract. The reason for this is that the contractor planning to bid a fixed price first goes to subcontractors (carpentry contractors, plumbing contractors, etc.) to obtain prices. The subcontractors obtain prices from persons, firms and corporations who perform labor and from persons, firms and corporations who furnish materials. Once the subcontractors obtain prices they add on their fee and the contractor then totals those and adds on his fee. Thus, there is no risk in a fixed price contract.
<<<<<
Many readers of breaktime also read JLC ( journal of light construction ). As such, they know that Quenda Behler Story is an attorney who writes a legal column for the magazine. Ms. Story has stated in the past that the property owner pays precisely the same amount for a fixed price contract or a cost plus contract. The reason for this is that the contractor planning to bid a fixed price first goes to subcontractors (carpentry contractors, plumbing contractors, etc.) to obtain prices. The subcontractors obtain prices from persons, firms and corporations who perform labor and from persons, firms and corporations who furnish materials. Once the subcontractors obtain prices they add on their fee and the contractor then totals those and adds on his fee. Thus, there is no risk in a fixed price contract. >>>>>then she's never executed a Fixed Price Contract ie: she doesn't know wat se's talking about... or.... you are misrepresenting her positionMike Smith Rhode Island : Design / Build / Repair / Restore
I would appreciate it if you could clarify something for me. Exactly how much more do you think a contractor should make on a fixed price as opposed to Cost +?<!----><!----><!---->-T
Since there’s been some talk promoting work for no profit, I’d like to bring up the subject of a non-profit contact.<!----><!----><!---->
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Don’t misunderstand me, I have nothing against profit, and I would much more prefer to make a profit than not make a profit. However, what about times like the winter that just past when thing are really slow? Wouldn’t it be nice to have either a non-for-profit business or non-for-profit division of your business to fall back on?<!----><!---->
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Working for a non-for-profit rate would of course allow you to under bid the competition. Could the tax advantages you receive in a non-for-profit business end up making you as much, or nearly as much as a for-profit business during slow times? After all, many for-profit businesses forgo profits anyway during slow times to stay afloat.<!----><!---->-T
You REALLY need to talk to your accountant and attorny to understand how taxes work.
First of all there is a difference between not for profit and non profit organizations.And what kind of tax benifits do you think that there is with either?With a few exceptions the IRS does not care if you make a profit or not. You pay taxes on the net "profit" (I am being general because there are some difference between being taxed as a corp and paying taxes on salary and being self-employeed where the net profit is your income, but the concept is the same). If you make more in one month than in another one you still pay taxes on the net over the year..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
oh , you mean exactly.....
i don't know exactly.......
but if you believe walt Stoeppleworth... the fixed price remodeler is marking up 67%
and the T&M guy is too insecure to do that... so the t&m guy is probably limping along from year to year
wondering why he has trouble paying his billsif i had to quantify... i think te differential should be in the neighborhood of 10% - 15%but i bet it isn't ... it's too hard a sell getting the T&M rates up to what they should beMike Smith Rhode Island : Design / Build / Repair / Restore
... it's too hard a sell getting the T&M rates up to what they should be
I agree... most of the time a HO will readily agree to pay a certain price for a job
he knows he can't do himself but very reluctant to pay you a top hourly wage( i.e. more than he makes)
On some of our projects, particularly the smaller ones we would make more on our labor at T&M rates then a 67% mark-up, though I've mostly moved us to 75%
If our labor cost us with full burden an average of $30.00 per hour. we make $50.00 per hour at 67 and $52.50 at 75.
My T&M Rate is $60.00 pr hour and I'm going increase to $65.00 in the near future.
I'm convinced that labor is the only thing I really have to sell. I can't go into specifics as Jerrald does but I agree with his concepts in theory.
Do projects really come in under budget? It's not something I've ever experienced as a consumer. I would be very surprised if my contractor came back and said "You know, it was easier than I imagined and here's some of your money back".
I'm a contractor myself, although not in homebuilding. All of our contracts are fixed price. If we end up doing something faster than we expected, I figure that's gravy for me. If it takes longer than I expected, that's my problem and I'll need to be more careful with the next bid.
Now, certainly, if a client wants to change the scope of work, then I'll tell them that it will cost extra - but that's different.
We're on the same page in terms of a fixed price contract and I operate the same as you.
For T&M work I give a range of x hours and y hours and $a worth of material and $b.
I try to make those numbers as realistic as possible with the low number being what my actual high estimate is and add a bit on top for the top dollar.
Once the work starts, given the scope, it takes what it takes and they are billed accordingly, so ocassionaly I do come in under what I told them it would be and more then not I'm within the range. Occassionaly it's more but I try hard to not exceed the high range by to much so long as the scope hasn't changed.
I gotta agree with Mike. You've mixed up some of her words. Bob's next test date: 12/10/07
am philosophically opposed to the idea of profit, which is unearned income.
Now it dawns on me, what's wrong with my financial plan to avoid tax on my capital gains.
Filthy lucre! Will you never leave me in peace! Aaarrrgh!
Edited 3/21/2008 7:29 pm by Hudson Valley Carpenter
A cost plus contract is appropriate for a project in which the scope is very uncertain. An accurate estimate cannot be made. It cannot be made because of uncertainty of what is involved, not because the contractor is poor at estimating.
"Cost plus" is short for "cost plus fixed fee". The way it works is the owner pays actual costs to accomplish the job, plus a fee that is set up front and is fixed, that is, no matter what the actual costs are the fee doesn't change.
For example, the parties might agree that a fair estimate for actual costs to perform the job is $10,000 (labor cost, materials, rented equipment, outside services, etc.), and a fair markup is 20%. So the fixed fee is $2000. If the contractor shells out $10,000 to complete the job, he is paid $10,000 + $2000 and he makes 20% on the job. If he shells out $20,000 to complete the job, he gets the $20,000 but still gets $2000 for markup, but that markup now amounts to only 10%. If the contractor can pull off the job for $5000, he makes 40% on it.
You can see the advantage for the owner is that the arrangement encourages the contractor to keep costs in line, because as costs increase the percent of profit goes down. For the contractor, it puts risk for unforseen circumstances and price increases onto the owner.
This type of contract is common in research and development work, such as defense work. When developing a new way of doing something no one really knows what it takes, so a contractor won't assume risk of a firm, fixed price. And a client won't give the contractor the open checkbook that T&M would give. It's a way of providing a fair sharing of the risk while providing incentive to be wise with spending choices.
There is also cost plus a percentage so it would be variable in the fact that you are promised to make 20% or 10% or what ever.
I've also seen hybrid contracts that are cost plus a fixed fee to a certain number and the a percentage for overage.
and I've seen cost plus with GMP.
excellent post"it aint the work I mind,
It's the feeling of falling further behind."Bozini Latinihttp://www.ingrainedwoodworking.com
There wouldn't be many business's in the world open for business if they did not generate a profit.Covering the costs you incur to provide the service is just half of the equation. How do you propose to GROW your business if all you do is recover your costs in terms of the money you charge and bring in?Profit is what allows us to grow, expand, buy new equipment, provide for slow times, etc.Theft??! WTF? Do you buy a cup of coffee and explain to them that you'll allow them $.26 per cup because that is what cover's their cost of providing it to you?Equating profit to theft means that you either have no idea of what the term profit really means or that you have some serious issues with the simple notion of capitalism and I'm surprised that you are even in business at all what with all the guilt you must have at even charging your base rate.Profit is what compensates you for putting your butt on the line and risking security to go into business for yourself and all the unknowns and unforeseen expenses and problems that come with that.Maybe in a perfect world there would be no need for profit, by I suspect your perfect world and mine might differ a tad bit in scope.JT
Edited 3/21/2008 12:33 am ET by JulianTracy
How do you propose to GROW your business if all you do is recover your costs in terms of the money you charge and bring in? Profit is what allows us to grow, expand, buy new equipment, provide for slow times, etc.
Why is growth necessary for success? This is the unquestioned assumption of western capitalism and also its downfall.
The only thing in nature based on a paradigm of continous growth is cancer. Every part of a sustainable system, whether biological, social or economic finds its optimum point of balance and stays there. If it exceeds that level, other forces come into play to return it to balance.
Human beings are the only species in the natural world who, through the cleverness of their minds, have managed to temporarily overstep the bounds of balance. But there are limits, and we are beginning to experience the effects of those limits in every facet of human life: climate change, species extinction, peak oil, population overshoot, forest destruction, soil depletion, potable water shortages... and now economic meltdown.
Theft??! WTF? Do you buy a cup of coffee and explain to them that you'll allow them $.26 per cup because that is what cover's their cost of providing it to you?
No, but I can choose not to patronize Starbucks or other rip off artists, and I buy organic, cooperatively-grown fair trade coffee which helps meet real needs.
Equating profit to theft means that you either have no idea of what the term profit really means or that you have some serious issues with the simple notion of capitalism and I'm surprised that you are even in business at all what with all the guilt you must have at even charging your base rate.
Capitalism is anything but simple (as exemplified by the current crisis in the securities industry). I have no guilt, but I try to charge a rate that feels fair both to me and to those with an authentic need for housing (I don't build McMansions or second homes).
Profit is what compensates you for putting your butt on the line and risking security to go into business for yourself and all the unknowns and unforeseen expenses and problems that come with that.
Life is about taking appropriate risks and being willing to accept the consequences. I don't live beyond my means, I don't take loans that I can't repay quickly, I don't live on credit (beyond the monthly lumber yard bill), and I don't believe that economic exchange is a form of gambling - it's a fair exchange between people to meet mutual needs, not a game of win/lose.
Maybe in a perfect world there would be no need for profit
Well, we can idly wish for that perfect world or we can actively create it. It's our choice.
Riversong HouseWright
Design * * Build * * Renovate * * ConsultSolar & Super-Insulated Healthy Homes
Bravo!!
no.... Cost PLUS is not short for Cost Plus Fixed Feealthough it can beCost Plus is this:you define "Cost" and you add a variable to that "Cost"a typical example would beCost Plus 25%and defined as such: [ ( Labor at (rate )) PLUS (( Materials , Subs & Equipment Rentals) x 25% ))] or also stated as 15% overead & 10% profitthe labor rate is structured to also make overhead & profitso you have to know your numbers (BURDEN % )Labor Rate = rate x burden x overhead x profitCost Plus a Fixed Fee is two parts..... COST ( which includes LABOR RATE + matls, subs, equipment rentals, etc. ) you can add an overhead % to any of these....
then you have to calculate the duration of the project and how much profit you would normaly make during that duration given the assets you will commit so.... if you would normally make say $60,000 on a project of this size in 6 months, then that would be your starting point in the negotiation of the FIXED FEEthe caveat is defining terms , scope , and indirect costs.....
done poorly....... you can wind up losing lots of money on Cost Plus Fixed Feenaturally..... all contract terms in the end are whatever the two parties agree on
but there are generally accepted terms depending on what entitiies you are dealing withMike Smith Rhode Island : Design / Build / Repair / Restore
Edited 3/21/2008 8:58 am ET by MikeSmith
The more I think about it, it seems to me the only difference between T&M and Cost + is that Cost + was designed for contractors who recover their overhead and profit by material markups while T&M was designed for contractors who simply include their overhead and profit in their standard billing rate. Just like any system with overhead and profit determined by material markups, Cost + simply complicates the construction adhesive out of everything.<!----><!----><!---->
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Cost + would be nice for a customer who doesn’t understand overhead and says something like:<!----><!---->
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‘What? $60 an hour! I don’t even make half that much where I work!’<!----><!---->
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Then you can say something like:<!----><!---->
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‘Okay, I’ll charge you $25 an hour plus 20% on all my labor and materials, or I can just charge you $25 an hour and 40% on all materials – unless of course you plan on buying something really expensive, then we can keep the material markup at 20%, deal?’<!----><!---->
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The only problem I see right now with T&M is that it doesn’t account for the risk of using more expensive materials. I think it would be nice to use a hybrid T&M that includes a + 1% material markup. That way, if I mess up one of your $2000 custom cabinets, I can afford a replacement part.<!----><!---->
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What do you think?<!----><!---->-T
think "Insurance work "
insurance companies review work appraisals
they don't quibble about a company's labor rate
and they have no problem with 15% overhead & 10% profit
although in some areas of the country they try to limit it to 10% overhead & 10% profit
Cost Plus is whatever you define the terms
T&M is whatever you define the terms
neither one inherently favors the customer or the contractor
it is how the terms are defined that favors one part or the other
this is just confusion in general that one title has restrictions that the other one doesn't
and , please, don't tell me that customers know the difference... they don't
the only thing they know is wether they trust you or not, define the terms... then stick to them and you will earn the trustMike Smith Rhode Island : Design / Build / Repair / Restore
as for risk .... in T&M ( & Cost Plus remember.... same thing ) the customer assumes the risk
if it's wrong , or the blade slips , or it checks & splits after you put it up, the remedy is to redo or replace.... ON THE CLOCK.... and the new replacement materials get charged to the cost also
if you are working so you are absorbing the risk... then you have the wrong concept of T&M or COST PLUS
on fixed price... the contractor absorbs the risk
the potential reward to the contractor should be higher in fixed price than T&M
due diligence is all you are promising when you do the work.. wether it is Fixed or T&M..... the risk is what transfers
ie: you can look the customer straight in the eye and tell them " we will take the same care in T&M that we will take in Fixed Price... and of course.. in T&M you are going to take even more care... it's not your clock...
but shid still happens..... why would you assume the GREATER risk in T&M if the reward is less... it doesn't make sense
you have to set the expectations when you negotiate the contract.... set the bar to high and you can never clear it
you want a pleased , satisfied customer.... set the bar even with the quality levels you can deliverMike Smith Rhode Island : Design / Build / Repair / Restore
I disagree with those who said that cost plus besides meaning cost plus a fixed fee could also mean cost plus a fixed percentage. Cost plus a fixed percentage is the same as a T&M contract. In T&M if the job is completed for more or less than the estimate the profit percentage stays the same. In cost plus fixed fee, if the job overruns or underruns the estimate the contractor makes a smaller or larger percent profit.
I think we're diving to a symantics.
I've seen several text books as well as other books spell out Cost Plus in all the way's I've mentioned.
Bottom line is if you have a system that works for you and your costomers are ok with it there is no "right" way.
I was curious how most people do it.
Everything I do is fixed price.
I have a question for the T&M or cost plus crowd. When a mistake happens on a job do you bill the customer for fixing it? Lets say you installed a bunch of patio doors and shimmed the tops when the instructions clearly state not to. Do you fix it all for free?
How about you install a $10,000 door with a dp20 rating facing the weather against the manufactuers published warnings... Are you obligated to replace it for free?
I have a question for the T&M or cost plus crowd. When a mistake happens on a job do you bill the customer for fixing it?
No.
Edit: If it's my error, or my employee's error, something that could've been avoided by being more attentive, it gets fixed on my time, my dime.
That's the same for me as a fixed contract. If I happen to run over a shrub next to the driveway, I'll go the nursery, buy a new one and do a careful job of planting it. It's just part of taking responsibility for myself and my crew.
I learned that mature attitude from a wise old man when I was in my twenties. Once I saw the value in maintaining that level of personal awareness/responsibility I seldom made errors due to lack of attentiveness.
Edited 3/21/2008 10:32 pm by Hudson Valley Carpenter
I once hung a simple interior french door for a Dr. He wanted to hire me by the hour instead of a fixed bid. We got into a prolonged discussion when I mentioned to him that if he's paying my by the hour, I'm not warranting the materials. When I further elaborated that if I make a mistake and cut the holes in the wrong spot for the knobs that he has to pay for the replacement door. That moved the discussion of a fixed fee, and the ensuing "profit" into the essence of why a fixed fee is more expensive vs cost plus and the value of risk vs reward. He wanted me to offer my services at an hourly rate, yet risk a sum that might be ten times that amount on the materials. As a matter of principle, I wasn't going to do that. We argued (negotiated) several times over a few days and eventually we agreed that I would work at my hourly rate + $100 to accept the risk of setting his prehung french door! Of course it went without incident. It was a prehung door! I think it took longer to strip the corner beads off the opening (he was converting an existing opening) than it did for me to get it hanging.I'm just pointing out that everything is negotianble. There is no right or wrong...just a meeting of minds. The Doc got what he wanted and I got what I wanted. I know many in here would not want to deal with a guy like this, but I didn't mind it at all. In fact, I actually enjoyed the mental challenge of getting him to understand the deal from my perspective. I guess real life mimic the spirited debate that goes on in here... Bob's next test date: 12/10/07
Edited 3/21/2008 10:00 pm by Jim_Allen
Speaking of prehung doors. This week I installed 3 exterior for a customer. One came in as a 3'0 instead of the 2'8 as ordered with the deadbolt keeper routed wrong Customer was fine with enlarging the opening for the larger door. Another had the hinges bound, with the top in the mortise and the bottom sitting proud. The third had no holes or mortising in the jamb for strike or dead bolt.
If I were a customer paying T&M I wouldn't feel any of these to be my problems and the contractor shouldn't expect me to pay him by the hour to correct them.... Having bid the job as fixed cost I have no problem making everything right. I was still able to finish the job in less time then figured.
Same job had 5 replacement windows my supplier order admittedly wrong. Added 3 hours total to installation to make them work. By bidding it fixed price I still made out fine and my supplier gave me a door frame I need for my own house. I was able to work that day instead of waiting 3 weeks for replacements and everyone is happy...
I'm sorry but T&M to me just seems to promote alot of fingerpointing and wasted time figuring out who's paying when things go wrong... which I have neither the time or stomach for.
That is the read on that single job.
I would not argue.
But I wouldn't throw generalizations out based on a single scenario.
You may be happy to have the info that sometime t&m works in different conditions, than to get get caught in the trap of "it worked yesterday so it will work tommorow"
Remodeling Contractor just on the other side of the Glass City
Perhaps it's just me... but no matter how big or small.... no job ever goes as entirely planned. Since T&M covers planning.... getting paid for something gone wrong is a bill I'd rather not deliver.
When things go to hell in a handbasket I'd rather look like the white knight to the rescue... solving the problem at no additional cost to the customer.... then handing them a bill I need to justify.
Bottom line every customers wants to know the exact cost of a job... otherwise we'd all be taking our vehicles to the dealer for repairs never knowing the cost till we picked it up.... and I seriously doubt anyone does that.
Bottom line every customers wants to know the exact cost of a job... otherwise we'd all be taking our vehicles to the dealer for repairs never knowing the cost till we picked it up.... and I seriously doubt anyone does that.<!----><!----><!---->
Perhaps not when we pick it up, but definitely not before we drop it off either. Unless you want something real simple like an oil change, the answer I always get when I ask "How much?" is "It all depends on what we run into." If I say I think the problem is . . . (whatever), they say “If it is . . . (whatever), it could very well be a ballpark of . . . (whatever), but we’ll see. Of course, after they start examining my truck, on the clock, they call me before doing any major work to give me a ballpark. Then if they run into something else, they give me another ballpark.<!----><!---->-T
journey... that's the way i do it too..schedule the truck appointment..... bring it i...... they fix it , give me an itemized bill .. and i pay it...
i don't have time to deal with people i do't trust..so i always try to develop a relationship of trust...
if they prove untrustworthy....... i may change vendors.... or i may just make a mental note that these guys need scrutiny to deal with themMike Smith Rhode Island : Design / Build / Repair / Restore
One of the great advantages of being in business for a long time is that you can take a long view of your business relationships. Whenever we use a new subcontractor or supplier, we treat it as a test.
Are they reliable? Do they get the work done or the materials deliver in a timely fashion? How do they handle money issues? Do they take responsibility for their decisions? Do they make decisions? How do they handle criticism?
Nobody is perfect but that is a good reason to try new people. Their performance will tell you much about your operation and your usual subs. You may find a great new resource, or someone you will use in a pinch, or someone to avoid forever.
You can use whatever form of contract you want (and we use them all) but none are as satisfactory as a solid basis of trust, "Just do the work and I will pay the bill."
you know.... there are some people i no longer do business with..
at one time or another thye have confided in me that they fudged a bill with another contractor they always felt justified in their mind
but it certainly told me what i could expect in the future if there was any disputeMike Smith Rhode Island : Design / Build / Repair / Restore
I do the same. I take my truck/car to the same shop and simply tell them to fix it and do it right. The last time I had my work truck in I told them I wanted new shocks. As I left I said "Vic, make sure you put good one on it" and he said "I knew that Dan, already have them here".
If I didn't feel comfortable with the guy I would take it there twice. Kinda like those clients that want 5 bids in my mind. DanT
"
One of the great advantages of being in business for a long time is that you can take a long view of your business relationships. Whenever we use a new subcontractor or supplier, we treat it as a test.
Are they reliable? Do they get the work done or the materials deliver in a timely fashion? How do they handle money issues? Do they take responsibility for their decisions? Do they make decisions? How do they handle criticism?"
That is really a good statement. I do it the same way in not only business but my personal business as well. Another issue I watch is how they react to a screw up or failure. We all have them, it is simply how we handle them.
I had a guy that I was feeding some emergency plumbing referals to. We are often booked out a ways and can't practicly handle a water heater etc. He did a good job. Then I had a house for him to look at a problem. I told him no hurry but I do need it fixed. If he was busy that was ok too.
He says he will be their Monday. Great. Monday morning he calls and says he ran over on a job could he make it Tuesday afternoon if he gets done. I said "hey, make it easy on yourself and do it Wednsday morning". He says that would work. Never heard from him again.
Saw him a few weeks ago. He never even brought it up. No apolgy, no excuse, just acted as though it never happened. So that ended that. If he had said something like "man did I blow it on that hot water heat deal at your house Dan and I am really sorry" I would have felt different and considered using him again. DanT
Jim, You keep posting this : ""I'm just pointing out that everything is negotianble."" That might apply to your attitude but it doesn't apply to mine. I have much in my life and business approach that is simply not negotiable.
They can't get your Goat if you don't tell them where it is hidden.
I never said anyone HAS to negotiate. I said everything is negotiable. You don't choose to negotiate. I choose to negotiate. I'm not going to say either position is better or worse. You can if you want. Bob's next test date: 12/10/07
JIm,
I don't think there is a right or wrong about negotiating. But If my position on negotiating is non-negotiable then your statement is wrong. Every thing is NOT negotiable. ;-)
They can't get your Goat if you don't tell them where it is hidden.
Nice try, but your position on not negotiating, is a negotiation in itself! When you offer a price, even though it's not negtotiable, it is an offer, which is one part of the negotiation. The other party also has a say in the deal: yes or no. If you can tell me that you set the price, and they cannot say no, then I'll agree that there is no negotiation. Oh yeah...:) Bob's next test date: 12/10/07
Ah... But my position on not negotiating is what what is non-negotiable, not the price (although the price is also non-negotiable from my side, I have no control over what the other party tries to do). ;-)
They can't get your Goat if you don't tell them where it is hidden.
"if it's wrong , or the blade slips , or it checks & splits after you put it up, the remedy is to redo or replace.... ON THE CLOCK.... and the new replacement materials get charged to the cost also"I was going to shoot that question to Riversong when he made that "profit is baaaaaad" statement. I wonder who absorbs the cost of his mistakes? Bob's next test date: 12/10/07
I was going to shoot that question to Riversong when he made that "profit is baaaaaad" statement. I wonder who absorbs the cost of his mistakes?
As you all know by now - I don't make mistakes. :-)
But, if I were to and it was a mistake in planning (such as the window I misordered on my last job because the Pella field rep wanted to get the order in before the end of the month and I didn't take time to double check my r.o.'s), I eat it.
If it's one of those many little errors of measurement or cutting that happen on any job that takes a few minutes or an hour or two or another 2x to fix, then that's part of the human condition and I'm being paid as a human being not a robot, so that gets charged to the job.
I warrantee my labor, code-compliance, and appropriateness of materials. But, since I don't mark up materials I don't warrantee them. Either the distributor or manufacturer does, or the customer pays for replacement.
Riversong HouseWright
Design * * Build * * Renovate * * ConsultSolar & Super-Insulated Healthy Homes
I'm talking out of school here, but admire the courage of your convictions. I have always been right of center and a capitalist advocate, but there comes a point when you have to think the unrelenting quest for growth may have something to do with resource depletion, etc.
Nice Smiley face !! I strongly prefer to run my small business on the same terms as you do. I have had customers who simply could not understand that method so on occasion I have rephrased my contract to a Cost + Fixed Fee.the customer who has such a vested outlook in capitalism and the need to make profit seems ti understand and accept it better when put into that form. Cost them the same either way .
They can't get your Goat if you don't tell them where it is hidden.
Time and Materials plus a 20 percent markup on subs, my labor burden on hired help, and materials. I do about 150K annually in volume with one partner for the last 6 months. Probably be closer to 200-250K this upcoming year, as I have a large project ahead.I bill for all planning, design, meetings, materials runs, etc.I spell it out very clearly to my clients what and how much I am marking up. I reserve the right to bill weekly, though in practice it's more like every other week. I expect payment within a week.I put in a clause that the clients can procure their own materials if they like, and avoid markup on them, but I will not warrant them or their installaion in any way, and if the dollar amount of the materials they procure goes above a pre-determined amount, my hourly rate will be 20% higher. What this typically results in is clients buying their own appliances, and not much else.If it costs me 60K to make you a kitchen, why should I give it to you for less than that, just because I was unable to foresee the final cost? I can lose money much more enjoyably sitting in front of the fire at home with my wife and my cats.My clients are all referrals and past clients. And many of them are my good friends as well.Steve
if it's wrong , or the blade slips , or it checks & splits after you put it up, the remedy is to redo or replace.... ON THE CLOCK.... and the new replacement materials get charged to the cost also
if you are working so you are absorbing the risk... then you have the wrong concept of T&M or COST PLUS
Are you saying that I should charge above and beyond my estimated labor time (including OP) for a fixed price contract because I'm absorbing the risk? Are you referring to something more than the common 5% contingency? I'm thinking you are referring to something more than a percentage for contingency because you say that you make more money on a fixed price than on T&M.-T
At this point it's almost all T & M, just because noone will ask me for a frikin' price.
Situation is very similar to Cal's.
Used to do all fixed price, somehow my customer base turned into just the good customers. We get along, they trust me, I trust them - they call and leave a message what they want done, and I do it.
I made more profit doing fixed price (depending how you did the breakdown), but, I make alot more money now.
Remodeling Contractor just on the other side of the Glass City
my favorite is Fixed Price
we also do T&M ( Cost Plus )
i've done Cost Plus a Fixed Fee
we do Change Orders in all three cases just to keep everyone on board
CO's are needed in the Cost Plus Fixed Fee if the scope changes because the Fixed Fee has to be adjusted
my favorite is Fixed Fee
I don't proclaim to be an expert but I'll explain what I believe the difference between cost plus and T&M is.
When we contract a project on a Time and Material basis. We charge $60.00 per hour of labor, and our cost for the materials & subs plus 25%. I do not have to justify my labor rate, it is what it is.
With cost plus I would have to figure my labor rate & burden plus all the cost of materials and subs and add a percentage or a fee on top of that. So if my labor cost is $20.00 per hour and I have a 50% burden rate. My cost for that employee is $30.00 per hour. In order to get back to the $60.00 per hour I need to charge for labor I would need to be cost plus 100%. No one is going to go for that.
So in order to get around that I need to tie anything at all I can to the project so I can re-coup my cost. I need to explain to the customer why a certain percentage of my over-head cost must be attributed to their project and I need to find a way to do so as accurately as possible plus make sure the customer buy's in.
Or I can figure out that I need to charge 60/hour/man to cover the overhead expences and avoid having to educate customers, who IMO don't really care to understand the cost of being in business for a remodeling company.
neil....
<<<<
With cost plus I would have to figure my labor rate & burden plus all the cost of materials and subs and add a percentage or a fee on top of that. So if my labor cost is $20.00 per hour and I have a 50% burden rate. My cost for that employee is $30.00 per hour. In order to get back to the $60.00 per hour I need to charge for labor I would need to be cost plus 100%. No one is going to go for that.>>>
no.... that is part of the negotiation
you already know what your company's labor costs and overhead are.
so you state that the parties AGREE that the labor rate will be $####....... from that point on you do not have to quibble about anything other than TIME CHARGED TO THE JOB
once you have agreed on the labor rate ( and you can reveal as little or as much of what goes into your rate as you care to ) then all you have to document is the time keeping and the (OTHER COSTS )
think of time & materials ( or cost plus ) as the way that automotive service stations work
they state their LABOR RATE , and you get an itemized bill
so many hours of labor..... plus the parts ( which are marked up , but you are not privy to the markup rate )..... if your prospective customer doesn't understand that just because you pay a guy $12 / hour... that is not your cost.... then those people ( customers) shouldn't be doing a Cost Plus or T&M contract
many never get it... one of the reasons i like Fixed Price.... the primary one being .. i can make more money on fixed priceMike Smith Rhode Island : Design / Build / Repair / Restore
I know this thread wasn't supposed to be about pros and cons, but I wanted to say that you hit the nail on the head with the downside of the cost+/T&M approach.
As a consumer, if I'm paying someone to lay $3 square/foot tile or $10 /square foot tile, the labor is the same. I don't like the idea of thinking "If we spend an extra $300 to get the nicer tile, that means we have to pay the GC an extra $100 as well". That just makes no sense to me.
One could make the argument that standards are higher with higher cost materials, or whatever, but I think the reality is that consumers who choose higher cost materials usually end up paying more for the same work, IMHO.
"One could make the argument that standards are higher with higher cost materials, or whatever, but I think the reality is that consumers who choose higher cost materials usually end up paying more for the same work, IMHO."
I think that what Mike Smith is saying is that a contractor can charge more for a fixed price job than for a T/M job because the customer is simply paying a lump sum rather than a labor rate and markup which are subject to more questioning and negotiating. The contractor only has to sell the number for the job and not the details of his business. He will still use his own numbers for the labor and burden and material markup to determine his price but the customer will never see those numbers. Thus, the contractor can charge more for the same work.
Since this is a business forum, this advice is completely appropriate in helping us to run our businesses in a way that will keep them vital for the long run, by making money. In the long run this is also good for the customers though it may cost them more in an individual transaction.
As an aside, the notion that most contractors are getting rich because of excessive profits is simply laughable. A simple review of the posts of this forum for the past few years would show that most of us are just scraping along. A few of us make a comfortable living but not even remotely in sight of our well heeled customers. Most folks here work hard and honestly for what is a modest living and should be encouraged to use business practices that will ensure the success of their businesses. If they are not making a profit, most of them will soon be out of business. How does this help anybody?
How will the customer never know the labor and material numbers if your state requires a preliminary lien notice and the preliminary lien notice requires disclosure of the numbers? For example, a carpentry contractor contracts with a lumber company to furnish material for the framing of a house. A preliminary lien notice would require the lumber company to disclose the amount which will have to be paid in order to prevent the lien. Similarly, suppose 20 carpenters form a corporation. The carpentry contractor contracts with the corporation to frame a house. The corporation may have any number of its members working on the project at any given time and some may be working on other projects and never work on that particular project. However, the corporation would still be required to give a preliminary lien notice and disclose the contract amount. The preliminary lien notice would require the corporation furnishing the labor to disclose the carpentry contractor who employed it and the material supplier furnishing the lumber would be required to disclose the carpentry contractor ordering the materials. These lien notices go directly to the property owner. Here is language from the Delaware statutes under which Tabasso Homes was indicted: "Any architect, engineer, contractor, subcontractor or his, her or its agent who pays out, uses, appropriates or consents to the paying out, use or appropriation of any such moneys or funds prior to paying in full all the claims of surveyors, engineers and all persons, firms, corporations or partnerships furnishing labor or materials, including fuel, as aforesaid, or prior to paying all such claims pro rata to the full extent of the moneys or funds received for the aforesaid purposes, shall be guilty of a misdemeanor and upon conviction thereof, shall be sentenced to pay a fine not exceeding one thousand dollars or be sentenced to imprisonment for a term not exceeding three years, or both." State v. Tabasso Homes, 42 Del. 110, 28 A2d, 248. The language employed speaks of persons, firms, corporations or partnerships furnishing labor or persons, firms, corporations or partnerships furnishing material. In the case just cited the Court said: "When an owner of land enters into a contract for the erection of a building it is understood that such contractors must arrange either for subcontractors or for labor and material. There springs into existence an implied agency of the contractor for the owner to obtain the necessities for the building, and upon this theory of agency rests the right of subcontractor, laborer or materialman to obtain direct liens upon the property." Obviously then, laborers (carpenters, plumbers, masons, etc.) can form firms, corporations or partnerships of which the statutory language speaks. While Mr. Smith of Rhode Island states that 67% would be the markup for a fixed price contract, you would still have to know the the total amount that would be marked up. So in order to have a fixed price of $167,000.00 of which 67% is the markup, you know that $100,000.00 is the amount being marked up. And this $100,000.00 amount would not be known until the subcontractors, laborers and materialmen give their prices upon which their liens would be based. The preliminary lien notices would total $100,000.00 after all the subcontractors turned in their notices and all the persons, firms, corporations and partnerships furnishing labor turned in their notices and all material suppliers turned in their notices.
I have managed to be in business for 30 years without filing a lien and hope to retire in this virgin condition. This is an important part of my business plan.
Though you seem to have the answers, I am unable to provide you with any useful information.
what makes you think you understand what the language means ?it is wholly impractical.... and i doubt that it has the intention you are reading into itnow... here in RI we have to send a "Notice of Intent to Lien" by return receipt, when we sign the contract..... or we forego our right to Lieni don't think you have correctly interprted the court case you are citingMike Smith Rhode Island : Design / Build / Repair / Restore
Here is language from the Delaware statutes under which Tabasso Homes was indicted: "Any architect, engineer, contractor, subcontractor or his, her or its agent who pays out, uses, appropriates or consents to the paying out, use or appropriation of any such moneys or funds prior to paying in full all the claims of surveyors, engineers and all persons, firms, corporations or partnerships furnishing labor or materials, including fuel, as aforesaid, or prior to paying all such claims pro rata to the full extent of the moneys or funds received for the aforesaid purposes, shall be guilty of a misdemeanor and upon conviction thereof, shall be sentenced to pay a fine not exceeding one thousand dollars or be sentenced to imprisonment for a term not exceeding three years, or both." State v. Tabasso Homes, 42 Del. 110, 28 A2d, 248.
This proves absolutely nothing about anything unless you show what "as aforesaid" and "for the aforesaid purposes" are refering to.-T
Fixed for all new work and most remodels, T&M on renovations when it seems better for both parties.
Almost all residential jobs are fixed price proposal. We will do allotments as needed.
We did one large commercial job as a CM. Our labor was billed at an agreed upon cost, and the client paid all invoices directly. Actually, we ordered a lot of items from suppliers and billed them for the actual cost.
We will do T&M if needed, but that's not that often.
Jon Blakemore
RappahannockINC.com Fredericksburg, VA
By far the best approach, with the new or casual customer, is to quote a fixed price. It's all very clear: the work is done, you get paid. Period.
T&M, "cost plus," etc. can only work when you have either an open ended job, toe work is ongoing, or the scope is unknown. Even then, it works only if there is a great deal of trust between parties. Such trust can only come after a long previous relationship.
The guy I worked for, before becoming a proud and desperate business owner,
had a one page T&M contract. We built custom homes $500K- $1 MIL range.
The only way to do that IMO is with a very sound reputation. I feel proud and
fortunate to have worked for that gentleman.