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I ran across a website (forgot to bookmark) in, I think, NM, where
a builder sez he has an open-book, cost plus 15% operation.
The more I thought about it, later, the better I thought it
sounded for all concerned. (Assuming, of course, that the
builder is reputable, has good track record, etc.) In these online
days, I could see a situation where the homeowner could easily
monitor costs, and be prepared to downgrade some bath
appliances if foundation work hit some snags, etc. I should
think relations beween builder and homeowner would be
better, in general. (Assuming, of course, that homeowner has
reputation of being a human being.)
I’m wondering how many of you builders have used this
system, or know of it, or know of problems with it…..
Replies
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YES!! Jim that is a good plan. As a general contractor that's how we do business. I couldn't imagine hiring a builder any other way. Hire someone you trust to be fair, who will do the quality you want and the construction process will be so much better…for everyone involved.
*I haven't built any new homes, but that is exactly the formula I have been using for my remodeling business. Seems about right to me.
*I've never worked "cost-plus", at least I don't think I have!Excuse my dumb question...What do you base the %15 off of? And how do you explain it to the customer? Thanks,JeffCost of materials, then what?Is it like working Time and Matreials? A set hourly rate, then materials w/ reciepts ?
*If you guys do this kind of work ( of which I am very envious)how do you answer the customers question of" How do I know you won't drag the job out to make money"That seems to be the mentality of northern ohio.I would love to do this system.
*Jeff - I bill my actual costs for labor, materials, subs - everything I am responsible to the customer for except the permit - add them up to get a sub total then multiply that sub total by 15% to arrive at the pretax bill. I keep a folder on each job that includes copies of each bill along with all the receipts applicable for that bill. All the information is there if there is ever a question. cc - I have never run had a customer ask me this, although I guess it is a legitimate question. I think new construction would be a little more clear cut, but I seldom see a set of plans for one of my remodels or additions. Design is a part of my service. Usually I have either worked for the customer before, or they got my name from someone I have worked for. At the first meeting, they usually want design ideas and a ballpark figure. I explain at that meeting that I can give a "bid" which I will have to inflate to protect myself, or we can go t+m. I explain profit and overhead and why I think they are better served with this arrangement. Most customers prefer this for anything over a couple thousand dollars.
*Jim, thanks.At this stage of the game, I'm still playing around with my hourly charge, trying to find a fair middle ground and still make a buck.I think I'll give your was a try. Jeff
*Jim, I got the impression (could be wrong) that the NM builder somehow had everything set up to be accessible online--books, building design, etc. Seems like it would be an easy way, all around; have you heard of such software or setup?That builder said exactly the same thing: he could inflate his bid to protect himself, or offer the cost-plus. It obviously has to come down to trust and reputation, etc, but it sure would make for a better world, eh?
*I also use the cost plus method, but may be charging more than I should - cost plus 25%. I've read in the trade mags where these large remodelers actually charge up to 50% or even 60% over - what's with this?Buz
*...buz...go further down this category to "Proof System" and "Walt Stoeppleworth"...it might start to answer your question...Mike
*Jim, in those using cost plus, or T&M, properly in order to mark up costs only 15%, you'll find that those "costs" include line items similar as is done in insurance rennovation: 1. Supervision2. Tools & equipment3. Telephone4. Office expensesIn other words, they break our any and all overhead expenses that can be attributed directly to the project at hand. As with many words in our language, the word "cost" and mean many things to different people. So, overhead item are in fact "costs" of doing business in general, and/or "costs" of doing the business attributed to only one particular project. If not, the others you mentioned using markup of 50% to 60% are in effect lumping all costs into overhead without pulling out those costs associated with one project, and that 50% to 60% also includes net profit. Remember one important factor: As a contractor increases his field staff, he increases his overhead simply because it costs the company more to run a business what way. Thsoe remodelers who sub out nearly 100% of the workmore resemble those builders who operate only from an office. Their overhead is exceptionly low - as little as 5% - 7% because they are mainly "facillitators and supervisors" of those specialty contractors. The remoldeing business I had and recently sold to my sons, had an overhead expense of around 32%, 1% - 2% less than Stoepplewerth stated in his old book for a company doing $500,000 in sales. Before I left, we switched over to subbing out nearly 100% of the work and at 2.3 million last year overhead dropped to around 15% while net profit literally doubled.No more aggravation of table saw motors burning, inventorying ladders, chop saws, nails screws, caulk, etc. , and a lot less paperwork. Overhead reduction is a natural consequence of that type of operation, and increased net profit is also a natural consequence because "guestimates" are nearly eliminated - subs bids are guaranteed and locked in - usually anyway. Creating an annual budget for your company is also made easier because you have many fewer line items to be concerned with. In fact, most budget items are office and supervision related.My point in this rather post is to make you aware of the fact that you should only compare your particular operation to others with a similar set up or category of operating type.
*Sonny, thanks for breaking it out this way. Gives a better picture of ins-and-outs.
*I use cost plus all the time building new homes. First you place yourself in a position of a construction manager. The owner is the builder and your contract should reflex this. It's important to nail down all cost before starting the project as well as you can. Cutting allowances in cost estimate to a minimum, i.e. kitchen cabinet layout and cost,lighting fixtures etc. Although this may take time and you already have permit in hand this will save problems down the line. If owner/builder build cost is greater than construction loan, either cost cutting will have to take place in budget or owners can prove they have reserve cash to cover extras. Usually I set up a joint bank account that the draw money is wired directly to the bank. At each draw both manager and sign checks to sub's for completion of work and review budget at this time. Any changes are carried out as usual with change orders. Your % is based on entire build cost.
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I ran across a website (forgot to bookmark) in, I think, NM, where
a builder sez he has an open-book, cost plus 15% operation.
The more I thought about it, later, the better I thought it
sounded for all concerned. (Assuming, of course, that the
builder is reputable, has good track record, etc.) In these online
days, I could see a situation where the homeowner could easily
monitor costs, and be prepared to downgrade some bath
appliances if foundation work hit some snags, etc. I should
think relations beween builder and homeowner would be
better, in general. (Assuming, of course, that homeowner has
reputation of being a human being.)
I'm wondering how many of you builders have used this
system, or know of it, or know of problems with it.....