The other thread regarding how to bid and the use of T & M got me thinking….what rate do you use for T & M? Not looking for the exact dollar amount as much as how do you arrive at it and how do you sell it to the client as I imagine most rates would be in excess of $75 per hour if you are talking about a large and complex project.
If I tell someone its $100 and I can expect to spend a week or so there its one thing but what if its an extensive remodel or a whole house? It seems like many clients might balk when they are looking at that rate over maybe 4-6 months.
Replies
First off a definition of T&M needs to be arrived.
If I look in the business dictionary it defines T+M as having 3 components.
http://www.businessdictionary.com/definition/time-and-materials-T-M-contract.html
1) Labor rate (actual cost )
2) Materials (actual cost)
3) Agreed upon compensation for overhead+profit.
If I am doing a strict hourly + materials then I put all my overhead, all my "wage" and all my profit into the Hourly figure.
I have rarely done those types for exactly the reason you pointed out.
But using the definition I linked I have done a lot of work under T+M. I use actual labor cost, actual material cost and figure out a "Fee" that I am comfortable with for the job (Cost + a Fixed Fee). The fee is comprised of overhead + profit.
Most people I have dealt with are understanding of the fee.
dovetail97128 — "But using the definition I linked I have done a lot of work under T+M. I use actual labor cost, actual material cost and figure out a "Fee" that I am comfortable with for the job (Cost + a Fixed Fee). The fee is comprised of overhead + profit."
Dovetail I don't agree with the definition for "time and materials (T&M) contract" and it doesn't jive with most of the other definitions I have researched and read. What they are calling T&M is really its close cousin Cost Plus Fixed Fee or CPFF. Under a CPFF contract labor 'cost' is often defined as a burdened labor rate to which a FEE is then added to cover the contractor's overhead and profit. In a Time & Materials contract the labor rate is typically a fully Loaded Labor Rate that includes all labor rated expenses (burdened labor costs) along with overhead and profit built into the hourly rate.
A Time and Materials (T&M) gig is typically going to be average to high reward (depending upon the billing rate you negotiate), low risk, and low volume while a Cost Plus Fixed Fee or CPFF will typically be low reward, low risk but potentially higher volume (a longer time period as well as larger scope).
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Precisely why I posted the definition. Until an agreement in common is agreed upon the term "T&M" is to wide open. I agree with your definition and have stated I prefer cost + a fixed fee. I disagree with you about the rewards however and would like to hear why you believe the reward is low.
They can't get your Goat if you don't tell them where it is hidden.
Well, I am not the only one who thinks the reward level is low for CPFF contracts in that in the research I've done on different contracting models that seems to be what the academic experts say about it too in the papers they right.
But my own anecdotal points I once illustrated in a discussion I started way back when entitled Pricing for ‘perceived value’. In my message #21655.10 there I told a little story about railing wreath fabrication.
If I was did that project on a Cost Plus Fixed Fee or T&M basis I would have had to charge what it actually cost me to do the work ($540 to $600) rather than what the work was really worth to the customer ($2400 to $2700 ).
In a Cost Plus Fixed Fee or T&M contract in a trade off for less risk on your part you lose those kinds of pricing opportunities.
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Not true. IMO Using your example you could have charged a fee based on the knowledge that you are the only one who could do the work.
IE: match what you actually ended up bidding it for.
Or alternatively raised the wage to do that difficult piece of work to reflect the fact you are the only one doing it.
Either way you can easily match the price you got by bid. You are the one setting both wage and fee.
Edited 3/3/2009 12:33 pm by dovetail97128
I charge materials at cost +5%; labour rates are quoted in the estimate--$xx.xx per hour with a set rate for each type of worker (skilled trades bill higher than helpers; leads more than apprentices).
Subcontracts are billed just like materials: my gross cost plus 5%.
Dinosaur
How now, Mighty Sauron, that thou art not brought
low by this? For thine evil pales before that which
foolish men call Justice....
5% is way too low. You need at least 20% to run a business.
I would probably say that you need to charge enough to cover all your direct costs plus any fixed & variable overhead.5% may be sufficient for some and 20% may be way to little for others.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
I'll stand by what I said, "5% is way too low. You need at least 20% to run a business."
At least 20%. Not less maybe more.
What are the items you are expecting that 20% to cover?
They can't get your Goat if you don't tell them where it is hidden.
What if you recover 100% of all of your direct costs AND overhead items in your billing rate? Would you go out of business if you just charged a 5% markup, which would essentially be net profit?What if I got into consulting work and charged $125/hr. If I had no material costs and I was able to bill for 2,000 hours per year, I would be doing quite well with no markup.I'm not trying to pick at your statement about 20% markup, I'm really not. I'm honestly just trying to point out that the "rules of thumb" don't always help more than they hinder.To be successful, a business owner must determine what their costs of doing business are and bring in enough revenue to cover those costs with some left over for profit.I know that I'm not telling you anything you don't already know. But some guy out there might be contemplating going on his own and think that if he mark his material and subs up 33% he will be on easy street. After all, that's 65% more than a 20% markup. But if he's not charging enough to cover his costs, he will sink.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
JonBlakemore — "I would probably say that you need to charge enough to cover all your direct costs plus any fixed & variable overhead.
5% may be sufficient for some and 20% may be way to little for others"
While I agree with you logic, in fact it is entirely possible if you have a very well designed loaded labor rate to charge nothing on top of your materials and subcontracting costs and still run a profitable company, but just marking up Materials and SubContractors only 5% (which by the way only returns a 4.8% Profit) seems like just giving away a profit making opportunity. Most people of average intelligence expect your company to do what it has to do to generate a "profit" and I think if you asked the average Joe and Mary on the street what they would consider a decent and acceptable Net Profit they would say 8-10% so why not markup those costs to at least hit those targets.
As for your comment:
"I'm not trying to pick at your statement about 20% markup, I'm really not. I'm honestly just trying to point out that the "rules of thumb" don't always help more than they hinder."
I couldn't agree more
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5% is way too low. You need at least 20% to run a business.
I'm not in business to sell materials. If I were, I would need to mark up materials a heck of a lot more than 20%. Mark-up from wholesale to retail on hard goods is typically something on the order of 100%...and in some specialised trades can approach 200%.
Remember: If I were trying to make money selling materials, I'd be competing with the lumber yards and big box stores. That means I'd be buying freight-car loads of materials at wholesale, stocking them in a warehouse, carrying the credit and breakage costs of those purchases, owning fork lifts and big delivery trucks to handle and deliver said materials, and hiring employees who do nothing but handle materials orders and delivery.
That's not what I do. What I do is sell design services, materials acquisition, and installation labour. Within the context of that business model, 5% mark-up on my gross materials cost is quite sufficient to cover my carrying costs and any other admin. overhead involved in buying the stuff and re-selling it.
Also remember that while I do get a contractor's discount from the yard, that's based on annual volume and since I'm only doing construction half the year, my discount rate is only 5%. The HO might be able to dicker the same 5% if he promised one yard all his business (altho he has to provide a credit card to which his daily balance will be charged; contractors get an open account payable 'Net 30').
Dinosaur
How now, Mighty Sauron, that thou art not broughtlow by this? For thine evil pales before that whichfoolish men call Justice....
Well I am in business to sell the whole package; design and build. I won't touch it for 5%., there is too many possible headaches with a bad light fixture or vanity faucet. Also my time on the job is figured in that 20% or higher.
Elsewhere you were talking about the permit business concerning having a trade license in Quebec & it nearly brought a tear to my eye as i worked in west quebec from 76 to about 80
the only place i seen as crooked as quebec was the carabean and south america and even they could learn from quebec
i bought a property there in 78 when lots looking at the river were $4000 & where i lived in farming country south of ottawa they were $2000
the one in Que is now worth $8ooo on a good day & the ones where i live south of Ottawa are now selling for between $45m & 60m
I let the one in Que go for taxes as it was nearly impossible to get around the red tape due to being a outsider i felt , Screw the Quebec politics i say even if the land there was nicer than here
the more Quebec screws around anglais the more they move to my area which is designated bylingual by the Ontario Govt and you can put a sign up here in any language you want as we dont have any language police PS a number of my neighbours are from France
Cost plus 5% for materials.
Cost plus 5% for subs.
Cost plus xx.xx per hour for labor.Why not cost plus 5% for labor?How do you keep track of labor hours? For example, 5 carpenters perform labor framing a house. They do so for a set fee of $17,455.00. How do you know how many hours it took them?
How do you keep track of labor hours? For example, 5 carpenters perform labor framing a house. They do so for a set fee of $17,455.00. How do you know how many hours it took them
Irrelavant if you are talking figuring profit. Paying employess is a different story.
Time Cards
They can't get your Goat if you don't tell them where it is hidden.
That is for payroll, which I didn't think he was referring to.
don't encourage him you two
pretty soon you will be arguing Az law and contractors that can't write contracts or have employees
he's been here b/4
Also for record keeping so one can then refer back to them for future estimates.
They can't get your Goat if you don't tell them where it is hidden.
true.
How do you keep track of labor hours?
Job time sheets, like everybody else. Each carp, helper, apprentice, whatever, that I hire fills out a time sheet for each job every day. I bill those hours out to the clients at the contracted hourly rate, and then use the same time cards to calculate the payroll.
For example, 5 carpenters perform labor framing a house. They do so for a set fee of $17,455.00. How do you know how many hours it took them?
If I hire a framing company to frame a house for a fixed fee, that's a sub-contract, in which case I don't care how many hours it took them. For all subcontracts, I just bill it out at my gross cost plus 5%.
PS--Hours I spend on site supervising and/or working with any subcontractor are billable at my hourly labour rate in addition to the 5% markup.
Dinosaur
How now, Mighty Sauron, that thou art not broughtlow by this? For thine evil pales before that whichfoolish men call Justice....
Do all subs bill at T&M too?
Do all subs bill at T&M too?
It depends. My plumber usually does; my electrician OTOH will usually quote me a flat fee to install the service panel and then to certify the rough my own people (usually me) have done before we call the inspection. I've been doing business with both of them for 15 years and frequently I'll work right alongside the guy(s) they send out; it all works out.
Some of the other specialty trades I don't usually handle myself: spray foam; excavation; forms; masonry. Some will quote a flat price or go T&M; others, as in the case of my mason, work by piecework: by the brick or CMU, or by the SF.
Dinosaur
How now, Mighty Sauron, that thou art not broughtlow by this? For thine evil pales before that whichfoolish men call Justice....
What do you do if they supply the material , ive had customers do that i felt to get around the markup i figure
my hourly rate is for my time only
my truck and tools are for use by myself and employes only
if any of the material is defective or wrong the then they have to take it back or hold up the job
afer 4 or 5 trips back ( 10 miles round trip ) the thrill of saving money seems to wear
off quickly & they suddenly seem to have more important things to do LOL
Customers who have done it usually tell me it dident pay them & what they dident say was it sure got them frustrated dealing with salesmen and clerks , i just find it funny as it always seems to happen & it sure raises their opinion of my knowledge .
Too much darn work scheduling, setting up, checking and communicating with in terms of subs to only mark up their services 5%.Not to mention - when a problem shows up a few months later from a sub's work - you are going to get the call.My last electrician on a kitchen job was telling me I obviously didn't know what I was doing because I was marking up his rate on that job.He told me that these days - contractors don't mark up electrical work. I'm not working for free - organizing and overseeing subs is work, and you need to get payed for it.Don't get me started on that electrician though - that was only one of the many issues I had with them. Inconsistent quoting, late to non-existent paperwork, BS change order charges. Good field work - sloppy office work.I stopped thinking about when he started telling me maybe I needed to get into a different line of business - thanks, but no thanks fof the business advice.Julian
Julian if you are charging your client for actual the TIME you spend "scheduling, setting up, checking and communicating" with subs in a T&M or CPFF contract then why do you need to mark up that cost to cover that expense again? You then only need to markup up that SubContractor cost for whatever you want to earn in Net Profit.
I think far to many contractors make a huge mistake by trying to cover the cost of managing subcontractors with a markup applied to that cost. Many times that subcontractors cost has no relationship at all to how much time you need to spend supervising that sub. Instead I think it is a far better policy to estimate the amount of time you think supervising a particular sub will take and to then charge for that time. Trying to account for the cost of that time through a markup applied to the sub cost is just plain old wild guessing.
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What do you do if they supply the material , ive had customers do that i felt to get around the markup i figure
I tell them that I will still guarantee my labour as to the installation, but that any issues with the material itself will be entirely their problem. I will not call the rep for them, deal with the supplier, or handle any of the other myriad of admin stuff that goes with a materials warranty issue.
I also tell them that if they don't buy enough, I will charge them by the hour to go and pick up additional materials, or by the hour to sit and suck my thumb while they go and get the stuff themselves.
I also mention that if they buy too much, the yard will back-charge them a 15% re-stocking fee for returns (as a contractor, the yard doesn't charge me that).
That little lecture, delivered politely and in a businesslike manner, usually persuades them my 5% markup isn't really that expensive.
Dinosaur
How now, Mighty Sauron, that thou art not broughtlow by this? For thine evil pales before that whichfoolish men call Justice....
Did a small powder room job, customer supplied toilett. Plumber installed it and flushed it. It leaked out a seat bolt hole. She was mad when I told her she was now gonna pay to have the defective one uninstalled and a new one reinstalled and she was paying by the hour till she got a new one.
Somehow I think I made out like a bandit compared to charging her 5% on a 100 dollar crapper. Not much I'll do for 5 bucks.
Oak River Mike what makes you think the hourly rate would be more for a "large and complex project" vs. a simpler one? What makes a large and complex project cost more is it requires more time and effort and that what drives the cost up. While there may be a Value-Added premium you can add to a large and complex project because you are "the only contractor in the area that is capable of putting a house up on gimbals that tilt it towards the sun to improve it solar gain performance" your rate is what it is regardless of the project. I am making that up but I hope you get the point.
View ImageAs for what that rate should be I would suggest you might want to read Ellen Rohrs How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image. It's a pleasant easy enjoyable read that will quickly take you through what you need to know about the true cost of running a business and how to understand what your billing rate needs to accomplish.
An you might also want to check out my shareware Capacity Based Markup Worksheet to help you set that rate. It's an excel based tool that you enter in what your fixed and variable overhead costs are, what you pay your employees, and what you want to make as compensation for both the labor you perform and your take as the business owner and it then computes that information and generates billing rates.
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Hi Jerrald,
Oh, I don't think one project would cost more per hour than another but if I tell someone its $100. an hour to rebuild their shower and it will take two days, I think they wouldn't be as shocked as someone who I tell it will take $100. an hour to build their house and it will take 6 months.
Thanks for the reading recommendations!
Mike