I am currently in negotiations on a project on the East coast and the general contractor has stated that he will do the project on a “cost plus” basis.
I have received his explanation of this type of agreement, but would like to hear what the customary explanation of this is from others. Is this a prudent way to enter into a contract?
From his initial proposal, I am being charged 10% as an overall management fee, another 10% for site supervision, and yet another 3% for his contractor liability insurance. This seems to equate to 23% of the cost of this project as management & overhead. This seems like “double dipping” to me. The contractor appears very knowledgeable and experienced but I just have trouble with these areas of his proposal.
Thank you for your explanations and advice.
Scott
Replies
The most important part of a cost-plus contract is to fully and completely define what is "cost" and what is "plus". Will the gc take the invoices from all the subs and add 10% (or whatever) to each of them? What about the cost of the permit, and utility connection fees? How will change orders be handled. It will be a rare event, but you also need to consider how a cost reduction change order will be handled.
Theoretically, a cost plus agreement can be beneficial to both the gc and the client. The gc knows that he will be covered for all expenses, and he doesn't have to put contingencies into his bid to cover unknown items. And the client knows that there is no contingency for issues that might not occur.
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
that depends what is included in his definition of 'cost'
On a large project - say a half million renovation / remodel I will spend 3-5 hours a day in managemant and job oversight, the remaining few hours wearing a toolbelt and producing.
So if he is charging you for all hours worked plus charging a fee for management and supervision, then that could be seen as a double.
I charge for all my hours, plus my markup fee as a percentage of the overall, which includes my overhead. I'm curious why in his mind, he would want to charge for only one item of his overhead separately.
And whether all this is 'fair' depends on the local market, his costs, etc. ie Maybe his labor rate is low by comparission to anotrher who might work his costs into the rate
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I always have a problem with cost plus...
they have no reason to try to save you money
they can have their unemployable son on the job sweep'n @ $40 an hour
had a guy i knew do'n cost plus and he billed everything... cell phone calls, copies, time on the phone ect... just like a lawyer...
like a management company for realestate... if it profits them to spend money..they will
Maybe I'm wrong on this but if a guy knows what he's doing he should be able to give you a firm price... built into that price is margin for errors I don't care if it's building a breadbox or a building... thats why he gets paid... he should also assume some risk... he does well he makes more... he doesn't do so well he makes less... seems on cost plus he screws up and makes more... man that sounds like a Gov. project...
p
My experience with "cost-plus" is in the large commercial realm. And as a previous poster has stated, there is no incentive to save money. The owner is fooled into thinking that they can save money this way, but it rarely happens.
In a cost plus arrangment an agreed plus is negotiated, and it must be an open-book operation. You must be able to see all expenses that you are going to be subject to.
On a residential project, I would recommend a consultant arrangement. You sign contracts with all subs. You hire a separate consultant to oversee the project. He will solicit bids, recommend which subs to hire, supervise the work, etc. For this he gets a set fee, either a lump sum or a percentage..