Okay, I understand that a fixed price is generally preferred by most long-time contractors. I also understand the advantage of T&M in regards to estimating. Here’s what I don’t understand:
Is it ever more advantageous to the contractor to use a cost plus (percentage or fixed fee) contract than a time and materials contract, besides the fact that the customer wants it that way?
–T
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Replies
Sure, as long as there isn't a ceiling to the cost + plus scenario.
In my mind, cost + plus usually has a clause that states "not to exceed". If you can avoid that clause, you're set.
Cost+plus is also easier to keep track of.
I sometimes use "cost + a fixed fee". The advantage to me is that if I want to suggest something that is more expensive I do not benefit financially, and the owner can clearly see that. Example: I recently bought a $40 Seiho wall cap for a vent fan termination, instead of the $8 plastic louvered version. It will help prevent drafts in a critical area. The owner gets a better project. They pay more, but they don't pay me more.
the terms "cost plus" & "time & materials " are often interchangeable
IE: there is no difference btween the two.. the devil is in the details... it all depends on how each is defined
Yeah, Do you want to buy a truck with four wheels or would you rather have one with three wheels plus one more?
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We would be more inclined to use a cost plus contract because we don't want to have any hourly employees. I'll sign any cost plus 30% contract for any job.
Bob's next test date: 12/10/07
How did you come up with the 30% figure?
They can't get your Goat if you don't tell them where it is hidden.
I thought about 20% and measured it against one million in sales and decided that it's not enough.I thought about 40% against the same million and decided that I could operate on less. 30% won out. It was a 30 second decision. I'll evaluate and re-evaluate that against real world results now. Bob's next test date: 12/10/07
This is how I see “cost plus†verses “time and materials.†With “time and materials†I get paid my billing rate by the hour (“timeâ€) and for my “materials,†whereas with “cost plus†I get paid my direct “costs†(mostly materials) plus either a “fixed fee†or a “percentage†for my overhead and profits.<!----><!----><!---->
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Therefore, if I work for “cost plus a fixed fee†I’m guaranteed pay for all my direct “costs.†However, if the job takes longer than I estimated I don’t get paid for my time anymore because my overhead (which includes my time in this instance), as well as my profits, are a “fixed fee.â€<!----><!---->
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On the other hand, if I work for “cost plus a percentage†I’m also guaranteed pay for my direct “costs.†However, even if the job takes longer that I anticipated, I will still be able to collect a “percentage†for overhead (which includes my time in this instance also) and profits, as long as there are still direct “costs.†In other words, if I’m using 20% as my “percentage,†and I do a job that ends up with $1000 of direct “costs,†I get paid $150 for overhead and profit. If the job takes twice as long, and IF I end up with $1000 more in direct “costs,†I get another $150.<!----><!---->
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Now if you include labor in your direct “costs†(which I’m guessing most of you do), than in a since “cost plus percentage†can still eliminate the need for estimating a timeline just as a time and materials contract can. Perhaps if I have enough direct “costs,†and if my direct “costs†are expensive enough, and if my “percentage†is high enough, I can make out better with a “cost plus percentage†than with a “time and materials†contract. But I doubt it.<!----><!---->
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JMadson:<!----><!---->
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The reason I doubt it is because of how complicated it all seems. Therefore, I don’t see how cost plus percentage (with no “not to exceedâ€) is easier to keep track of that simply charging by the hour and for my materials.<!----><!---->
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davidmeiland:<!----><!---->
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I can see how cost plus a fixed fee would make it easier to suggest more expensive materials as compared to a fixed price. However, I don’t see how it makes it any easier as compared to time and materials.<!----><!---->
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Jim_Allen:<!----><!---->
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I don’t understand why charging your customers by the hour requires you to pay your employees by the hour.<!----><!---->
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The way I’m seeing it right now is: “Cost plus a fixed fee†contract = a “fixed price†contract with revealing all of your numbers for direct “costs†to your customer. The way the rest of it looks to me right now is: “Cost plus percentage†= a “time and materials†contract with revealing all of your numbers for direct “costs†(labor and other direct costs instead of just material cost) to your customer. Hence my question: ‘What benefit is Cost+ for a contractor as opposed to T&M, besides the fact that the customer wants it that way?’<!----><!---->-T
>>I can see how cost plus a fixed fee would make it easier to suggest more expensive materials as compared to a fixed price. However, I don’t see how it makes it any easier as compared to time and materials.
I'm not sure if you have made a distinction between cost-plus and T&M, and there really isn't a big one IMO. With T&M there is usually a straight percentage charged by the contractor, so more expensive materials or techniques net the contractor more money.
journey......it's any way you define it
BUT..
a normal , usual , Cost + Fixed Fee
would be Cost [( defined labor rate which includes all burden and overhead ) +
(materials + subs+ permits+engineering+plans+ anything related to cost )
PLUS Fixed Fee ( whatever... which amounts to the Profit you want to earn for the estimated time of the contract )
so ... if you think it will be 6 months and you want to make $6000, but it takes 8 months and you still only get tje $6000
HOWEVER..... if the scope changes, then ther should be a clause to allow Change Orders, which will increase the Fixed Fee to reflect the additional time
anyways.... depending on how you define the terms, both contract types could end up with exactly the same total cost to the customer
in other words T & M includes all costs and overhead & profit
and Cost Plus fixed fee include all costs and overhead and profit...... the only difference is the negotiated Fixed Fee doesn't change unless the scope changes
neither guarantees a "not-to-exceed price " to the owner
if there is a not to exceed, then you are betting against yourself..and always keep in mind
risk = reward
edit
don't forget.... suppose you think it will be 6 months..... but it winds up at 18 months
can you really forego a year's worth of profit ?...
you have to have escalation clauses to protect yourself
Mike Smith Rhode Island : Design / Build / Repair / Restore
Edited 2/25/2008 12:27 am ET by MikeSmith
Great post and clear. I do think that the "Risk = Profit" though is an overstatement . Risk = A chance for Profit or Loss. Thats is the definition of "Risk" in the business world.
They can't get your Goat if you don't tell them where it is hidden.
i didn't say risk = profit
i said risk = reward
my point being,........ anything that shifts the risk from one party to the other should also shift the reward
in cost + fixed fee..... the contractor does an estimate (wether he shares it or not )
based on that , he negotiates his FEE..... if the owner changes the scope, he has changed the duration and moved some of the risk back across the equation
so the fixed fee should change also
now... if the scope doesn't change , and the builder did a poor job of estimating the duration ( or what ever he based his FEE on )... then that's too bad... no scope change, no Fixed Fee changeMike Smith Rhode Island : Design / Build / Repair / Restore
So You did. You are correct, getting late and tired here. My brain is substituting words on the screen.
They can't get your Goat if you don't tell them where it is hidden.
I hold a different opinion on the distinction between cost plus a fixed fee and cost plus a %. With either I consider all of my hourly rate costs (including taxes, bookkeeping, tool maintenance etc, etc.) Materials , fuel , phone bills , are all part of the costs of the job. Where the two are different IMO is in that if I charge a fixed fee ( customer is paying for my knowledge and experience, and profit) at a fixed amount, and no matter how much things change or in which direction along the way the only portion affected is my profit. With Cost + a % the customer is paying for my knowledge, experience and profit as a % of the total costs of the job. This method means my % of profit would remains stable no matter which direction or changes are made. For me I prefer the fixed amount. I have found that once explained to a customer they have less fears of me trying to find more expensive methods to finish the job because I have eliminated myself from profiting from those type of changes.
They can't get your Goat if you don't tell them where it is hidden.
when I worked for uncle, the difference between a T&M and Cost + is in what was delivered legally.
T&M delivery was time and materials, even though the time and materials were used to build something.
cost+ a "thing" is delivered.
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG