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Steve M.’s thread on cost-plus and this article dovetailed today.
the author says at one point:
> A system [cost-plus] that requires reams of detail, that has to be scrupulously accurate, and that includes a boatload of time spent on meetings, phone calls, and e-mails clearly isn’t absolutely necessary for garden-variety bath or kitchen remodels or window replacement projects. And because the vast majority of remodelers do those sorts of jobs–modest in scale and scope, relatively easy to estimate–it’s no surprise that most start out using the fixed-price system and stick with it because it works for them.
she’s kind of talking about really big jobs here but I thought it was interesting how this goes against the grain of some things I’ve read, where cost-plus or T&M is recommended for the smaller or new contractor and fixed-price reserved for the experienced ones!
chrs, GO
Replies
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the problem with cost -plus is that invariably there is an estimate... or a request for an estimate..
and it almost always comes in over the estimate...
and the customer is unhappy..
but if you quote a fixed price.. everyone lives with it..
if you quote it right , you make money and you have a happy customer..
*GO,Screw up enough fixed price jobs and you'll be experienced in no time at all.Nothing makes a person more real cost aware than losing money.Ed.
*With all due respect to Mike and those who may disagree.Cost plus can be preferable in many circumstances. A few that come to mind are jobs where scope cannot reasonably be determined, and/or where addons and changes are anticipated. In these situations, a standard construction contract can be weighted in favor of the contractor. A homeowner is at the mercy of the contractor after the job starts. In my contract, the owner cannot hire others to do work while I am there unless I agree upon it. In which case I will mark it up. In other words, once the job starts, I get all the work at my price or the work won't be done until my contract is fulfilled. This give me a temporary monopoly on work at their house. Although I am careful not to abuse this situation, it does require a leap of faith in the situations described above.Very few professional bid work. Try that with your lawyer, or doctor. I had occasion to visit a marriage counselor who charged by the hour. After the first visit, I asked her to bid the rest of the job. I thought she had enough time to assess the situation and estimate the cost of completing the job. I guess I'm lucky to still be married. I sometimes don't understand how we as contractors are expected to look at a house and predict all the underlying issues that we will have to contend with. If we can't bid it, we are assumed to lack experience. Why can't a lawyer bid a price on a legal job? Certainly they must be experienced enough to predict with reasonable certainty the difficulties to be encountered and guess at the rest. Ahh, but then they would be encouraged to get the job done more efficiently. And if the results were bad, they would have trouble attracting new clients. Sounds like the same dilemma a contractor faces.At least that's what I think.
*tommyb... yup , we do disagree..cost -plus is necessary when you can't define the scope or when you are doing force account....but you'll find it difficult to make any money... and even more difficult to grow your business...customers want to know how much it will cost.. you can't tell them with cost-plus...if you can, it ain't cost plus...it's "guaranteed max"..it's much better to learn how to estimate for a profit.. then give a price based on that estimate.. and both parties can live with it and get on with it..you'll get a lot more repeat work with bid work than you will with cost-plus... and no one cares if workers arrive late... or they take a coffee break.. or you have carpenters doing clean-up and laboring...with cost-plus , you will always be second guessed as to the efficiency of your operation...we do a lot of cost-plus work... it is just as time consuming as bid work... but the time goes on the end instead of the front...happier customers with bidwork...that's all i'm saying...
*>Why can't a lawyer bid a price on a legal job? Certainly they must be experienced enough to predict with reasonable certainty the difficulties to be encountered and guess at the rest. Ahh, but then they would be encouraged to get the job done more efficiently. And if the results were bad, they would have trouble attracting new clients. Sounds like the same dilemma a contractor faces. That's exactly how most criminal lawyers do it. We want to get paid up front (not like our clients are necessarily trustworthy or they're going to pay you afterwards if things head south). So, on our very first meeting, we estimate the price and live with it. Sometimes it works out well, sometimes not, and often it's not at all easy to foresee what's around the bend.SHG
*SHG, I'm limited in my experience with lawyers but want to know if you fellows sign contracts. I'm not being facetious but I have never seen a contract between a defendant and a lawyer or a lawyer and anyone else for that matter. Seen plenty of them draw up contracts but it always seems to be for someone else. Skip
*I stand corrected SHG. Mike I do agree with what you say, and will heed your advice. You have many more years experience than I do. Thanks for the input.
*I've worked with lawyers who used signed contracts. I've also used lawyers who used verbal fixed prices.You have to learn to negotiate with your lawyers just like you do to buy a car.blue
*There isn't a right and wrong way. Some situations are better suited for cost plus. Some contractors are better suited for cost plus. It's not for everyone, but it can work well. Ive done several, but I mostly used fixed prices. I've done cost plus, not to exceed. I guessed high and barely brought the bacon home. But, I did bring the bacon home, and I also got the job away from my fixed cost competitors. The client simply liked the idea of possibly saving money. In the end, he didn't save any money, but we tried.blue
*We are just subs, but all our work is cost plus. All the builders we work for are cost plus to the clients as well.The roofer can give a hard number. There are only so many squares of roofing and felt. The painter gives a hard number. By the time he gets there, everything is done. It's harder for us. The gotchas in remodeling are obvious. I could spend all my day writing change orders, holding up subs until the money is worked out and frusterating the client with options and demands on their time to make quick decisions.On most large jobs we do, the client and architect don't have the drawings for the first floor when we start the second floor. How am I going to bid that?Cost plus is a trust thing. A gentlemens agreement if you will. Both parties have to trust each other to perform and to pay. It's not for eveybody, and not for people of modest incomes. I'd never hire anyone under those terms......I couldn't sleep at night. But I hire out our crews like that everyday, and yes, you can make money that way.We're doing the trim and cabinets for a medium size spec house right now, about 5000 sq ft. The deal is cost plus. The builder said she wouldn't consider anyone else but us for this job.It's a trust thing. She will get a good job at a fair price that she can market with pride, and I will make a fair profit. Neither of us will make out like bandits, but neither of us will get ripped off either.No contract, just trust.I know, I know, some of you guys will chringe and ney say, but after 11 years in business I've never had a problem with this method. 11 years is a pretty good indicator that if something is still working, it works.Ed.
*Ed,Would you mind sharing what hourly rate you billed the builder at for the custom cabinets? aka...what is a fair price?I honestly have not idea...but as I add more carpentry work to my jobs, Ive always been curious what a "fair price" for carpentry is, and if it's more than I charge for painting. I just don't know any carpenters...I'm strictly repaint. When I do T&M work, it's mostly for previous customers and I bill at $45/hr. + materials. This is also what I bill for carpentry work that pops up unexpectedly on a job...which happens frequently.Thanks for any info you'd care to provide...Q
*COST-PLUS VS. FIXED COSTPRACTICE VS. PROFITGeorge,There are many different opinions regarding cost-plus and fixed cost, and for the person holding either belief system they are right for themselves. George – “I've read, where cost-plus or T&M is recommended for the smaller or new contractor and fixed-price reserved for the experienced ones!”Richard - Often advocates for cost-plus are risk adverse. They don’t want to take the risk of the unknown. Cost plus severely limits the ability to make profits, but basic wages are guaranteed. Cost Plus is also useful for safely determining cost for a future fixed cost pricing structure. This is a business model where practice is more important than profit. For many wages is what they want from their business. Profitable fixed cost contractors minimize the risk and maximize the profits in a project. The profitable fixed cost contractor is in business for wages and profit, not practice. These profitable contractors have agreements with Owners that describe unforeseen conditions, forewarning possible Additional Work Orders. Their agreement avoids most downside risk. Their agreement basically provides the same protection for the contractor as cost-plus, plus preserves the ability to make a profit.To maximize Client Satisfaction and avoid dissatisfaction with any “project changes” requires full disclosure and communication with the Client what is included in the base fixed cost agreement and mote important WHAT IS NOT INCLUDED IN THE AGREEMENT. In addition, the contractor often needs the skill set to handle disputes where the Client negotiates and says “but I thought that was included in the contract.” He/She needs a pre-determined process for resolving such issues that educates the Client so the end result is 100% Client Satisfaction.There was a point in my career where I had to face a simple fact. Was I in business for practice or profit? When the focus shifts to profit making it is rare to find a project that requires cost-plus. There is always a way to bid it fixed price. If not, move onto a project that includes profit.The best way to learn how to maximize profit opportunity and use fixed cost is to network with profitable contractors that know how to be profitable with fixed cost. There is no reason for a small contractor, or someone new in business, to suffer through “trial and error” to learn this business. Instead of reinventing the wheel simply mimic successful contractors.If you operate your business just like a successful contractor you will automatically become a successful contractor.Richard Kaller
*Richard, how do you find the time to stick your s**t into every thread? Do you really think you are making headway here, that we will all see the light soon and start writing checks for $3,500 memberships in Richard's fan club?Do you really think that every one of these questions is directed your way? Is it possible there is some subject for which you do not have the CNN "Best Practice" answer? Is it possible that you will go away and play with yourself somewhere else?How many internet sites are you polluting with your garbage? One other that I know about, how do you find the time? b GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY GO AWAY. Or to quote Blue, b BLAH BLAH BLAH BLAH BLAH BLAH BLAH BLAH
*I'm going to break my own rule here. Just wanted to let everyone know up front that this is a deliberate act. The BS has gotten too much for me.Richard Kaller you are not only ignorant but you are totally out of touch with the facts of business. Now I don't lightly make such comments about anyone. But I'll make an exception in your case.Your diatribe is so full of misinformation that anyone following your ideas is almost guaranteed to fail. One example, the one that set me off, is: "Cost plus severely limits the ability to make profits, but basic wages are guaranteed. Cost Plus is also useful for safely determining cost for a future fixed cost pricing structure. This is a business model where practice is more important than profit."ACTUALLY, Cost Plus is used successfully by many different companies to make LOTS of money. In fact this is probably the most common type of contract in very large projects. In fact it will bring very high profits because profits are usually defined as a percentage of costs. That is why owners don't like cost plus. The contractor has minimal incentive to keep costs down. In fact the only effective way for the owner to keep cost down is to appoint a Clerk Of The Works. And that is often not effective enough.SO, if you are so wrong on such a basic thing you must really be ignorant enough not only to preach error, but to convince yourself that what you preach is right.Readers beware, this guy is not only trying to fool you, he is successfully fooling himself.
*Fred,I agree a lot of construction, especially major construction is bid cost plus.Nonetheless, since most contractors on this board are not building multiple million-dollar projects are you saying that the profit for them is higher on cost plus vs. a profitably bid fixed cost?If so…………..In your area what profit margin, net bottom line, does cost plus allow?What percent is allowed for overhead?Richard Kaller
*Warning.Beware, poster and lurker alike.This man is trying to sell you something. Do not listen to him. He is very convincing. He can make a splinter under your fingernail sound like a good idea. Do not be fooled. He wants to sell you a 'program'. You pay outrageous 'fees' for the right to listen to this person's advice. His advice is all smoke and mirrors. He and his company are the amway of construction sales advice.He claims to be selling advice. What he is actualy selling is an addiction. Listen to his 'advice', and he will string you along with 99 percent bullshit, and 1 percent real advice. The 99 percent bullshit is there just to inflate the 1 percent into seeming like more than what it is, and to keep stringing you along so he can get you to pay for even more of his bullshit.Do not be fooled. Be afraid. be very afraid.
*Luka,Based on what research did you come to your conclusions?Richard Kaller
*Maybe he's read the 50,000 words of wisdom you have posted here despite the dozens of people asking you to vanish from the planet & Breaktime too.Maybe he just guesses you're some kind of rude a**hole salesman type from the way you act here.Maybe he's made a guess that since you won't take no for an answer, won't take go away as an answer that you are an a**hole. I think he may be onto something.Anyone else agree with Luka that Richard might just possibly be an annoying a**hole? Joe H
*Warning.Beware, poster and lurker alike.This man is trying to sell you something. Do not listen to him. He is very convincing. He can make a splinter under your fingernail sound like a good idea. Do not be fooled. He wants to sell you a 'program'. You pay outrageous 'fees' for the right to listen to this person's advice. His advice is all smoke and mirrors. He and his company are the amway of construction sales advice.He claims to be selling advice. What he is actualy selling is an addiction. Listen to his 'advice', and he will string you along with 99 percent bullshit, and 1 percent real advice. The 99 percent bullshit is there just to inflate the 1 percent into seeming like more than what it is, and to keep stringing you along so he can get you to pay for even more of his bullshit.Do not be fooled. Be afraid. be very afraid.
*Wow,FredB's got his hackels up.........good show.QC,Most high-end carpentry subs here in Dallas go for about $30 an hour. More for smaller specialized people but they don't work year round like we do. Even the bootleggers are getting that. I run at about a 12% to 15% profit margin which covers me AND overhead.I know, some will say that's not enough. But you try subcontracting construction this close to the border of Mexico. We're lucky to get that.I estimate cabinets at $600 a foot for uppers and lowers of a stain grade with raised panel doors. Material and labor installed. The usual style. More for the furniture pieces. I have yet to fail coming in under that number.Ed.
*Warning. Beware, poster and lurker alike. This man is trying to sell you something. Do not listen to him. He is very convincing. He can make a splinter under your fingernail sound like a good idea. Do not be fooled. He wants to sell you a 'program'. You pay outrageous 'fees' for the right to listen to this person's advice. His advice is all smoke and mirrors. He and his company are the amway of construction sales advice. He claims to be selling advice. What he is actualy selling is an addiction. Listen to his 'advice', and he will string you along with 99 percent bullshit, and 1 percent real advice. The 99 percent bullshit is there just to inflate the 1 percent into seeming like more than what it is, and to keep stringing you along so he can get you to pay for even more of his bullshit. Do not be fooled. Be afraid. be very afraid.
*Very Cool, Luka!
*George:Back to your original posted question about Cost Plus or T&M(Time and Materials) vs Fixed Price when bidding a contract.The reason why it is easier for the bidder to do well on the variable priced bids is that the Owner takes the cost risk. The Bidder only has to negotiate his percentage in Cost Plus or the Time rate in the T&M. That means that unless the contractor has bid a losing number a profit is guaranteed.On the other hand a Fixed Price bid places all risk squarely on the Bidder's shoulders. So, to do a reasonable job of bidding without assuming unacceptable risk the Bidder must both know a lot about the prospective job AND know what his costs are for each element of the job.So, unless you have a pretty good cost accounting system that produces reliable cost data for you it is really hard to do a good Fixed Price bid on any but the simplest of jobs. Most new contractors don't have the historical cost data to do a good Fixed Price bid. So, they are better off with either of the Variable Price methods. Which you use isn't a matter of your company's size. It is a matter of its' experience level/data bank.Properly done any of the three will produce a contract that gives the Bidder the desired profit and the Owner the completed job at an acceptable price. Which is best for a specific job depends on the nature of the job, the amount of cost data available and an agreeable audit function so no one gets taken to the cleaners..
*
Steve M.'s thread on cost-plus and this article dovetailed today.
the author says at one point:
> A system [cost-plus] that requires reams of detail, that has to be scrupulously accurate, and that includes a boatload of time spent on meetings, phone calls, and e-mails clearly isn't absolutely necessary for garden-variety bath or kitchen remodels or window replacement projects. And because the vast majority of remodelers do those sorts of jobs--modest in scale and scope, relatively easy to estimate--it's no surprise that most start out using the fixed-price system and stick with it because it works for them.
she's kind of talking about really big jobs here but I thought it was interesting how this goes against the grain of some things I've read, where cost-plus or T&M is recommended for the smaller or new contractor and fixed-price reserved for the experienced ones!
chrs, GO