Hello all. I have an opportunity to meet with some folks tomorrow evening on a build job. BTW, I live north of Kansas City, Missouri. Anyway, All my build jobs up to this point have been fixed price contracts. I am not real familiar with cost plus. I know the basics, but what do you figure the plus on? Just the actual hard construction cost? What about the lot? Is it based on the entire completed price? Any information would be greatly appreciated. Also, I know it will vary by regions, but what do those of you that do cost plus normally figure as the plus. Again I know that each individuals overhead and profit margin are different, but any information is helpful. Again, thanks for your advice.
Mike
Replies
I havent had a chance to read this yet, but someone posted it here not to long ago, might be worth a look over
http://www.markupandprofit.com/resources/costplus.htm
Mike,
Interesting that cost plus is a new experience for you. I find it the only way to do business as I am generally too optimistic to come up with a realistic bid amount that will end up being profitable. So I admire you for being able to work on a bid system.
With all that said, this is the way I work it out. I set an hourly rate for labor which I keep track of on a "time card". I keep receipts for EVERYTHING that I use on the job. I compile these costs at an agreed upon billing cycle (generally 2 weeks) and then add up all the costs and then multiply by the overhead figure and add it up. Around here (South Dakota) the typical overhead rate ranges from 10% to 20% or so. I base the overhead amount on the overall estimated cost of the project and the scope of work. A small job with lots of travel time will generally require a higher rate. A larger job will work out with a lower percentage because there are more $$ involved. Also, the ratio of labor cost to material cost has an effect also. I feel the whole process involves trust in the contractor/ customer relationship as well. My customers trust me to bill the time accurately and not cheat them on materials while I trust they value the quality work I do and the attention to detail they get from me to be worth the cost. In the long run, I feel I give my customers a better value for their $$ because they get exactly what they pay for (I don't have to cut corners in time or materials to stay profitable) and don't have to play the "lowest bidder" game either. But that takes trust.
I don't know exactly how I would approach the lot price you mentioned, but I think I would leave it out of the equation but make the overhead percentage a little higher to end up with the same net profit. For example a 1 or 2% overhead difference including the lot would be nice for you, but might come across wrong with your client.
Hope this helps your thinking a bit and good luck with your meeting.
The Timber Tailor
We do a mixture of fixed price and cost/plus. We only use cost/plus when the scope of the project is indefinite and even in those cases we insist that there is a rigorous budget. The only problems that we have had in the past is when we(and the customers) ignored this budget without clearly communicating this in the middle of the job. Figure this budget with the same thoroughness that you would give to a fixed bid.
We include our O and P in our labor rate and since we provide the bulk of the work ourselves, the markup on materials and subs (10%) is mostly just gravy though it helps cover any goofs. We don't rely on that for our profit. If you sub out most of the job you will have to mark up more to make money and rely on greater efficiency of your subs. Good luck.
Mike,
A side note for cost plus construction. Where I live, the tax rules change for cost plus contracts. The contractor must purchase all materials with a tax exemption and then collect sales tax from his/her client and remit the sales tax to the state. The proper paperwork is essential. If the contractor fails to do this correctly he/she may be required to pay the tax again.
Alot of contractors get in trouble or go out of business this way. This is alot of work. Be sure to check out what your state requires.
The only time I do cost plus anymore, is when I enter into an agreement with known investers. Its repeat business and we both know what to expect.
Remember - Check your state tax statutes.
WAHD
Cost plus seem to work best when there are little detail, unknowns or expected changes. It would not do the customer right to give them a fat bid to cover the unforseens and its not right to stick the contractor because details where not clearly defined.
That being said, clearly state beforehand what will be charged to cost and what will be O/H. Usually I figure anything used on that job is part of cost,i/e blades, small tools, etc. Anything you carry to the next job needs to be figured in your O/H.
Clarify if the percentage will apply to products the owner buys that you intall. (They should apply)
Trucks (fuel and cost of operating), labor, Insurance(Liab and employee),taxes need to be part of your hourly labor rate.
The mark up would be any office/shop overhead, equip and tools, and profit.
I here of 8% on large jobs ($500k +) up to 20% on remodel and small jobs.
"I here of 8% on large jobs ($500k +) up to 20% on remodel and small jobs."
If that is all you have for overhead and profit, you will lose your *ss. If that is all the homeowner thinks you should be making, don't let him make a sucker out of you.