*
I thought George’s questions deserved an answer that wasn’t lost in the morass of commentary.
George:
Back to your original posted question about Cost Plus or T&M(Time and Materials) vs Fixed Price when bidding a contract. Another way of looking at it is that Cost Plus/T&M are Fixed Rate Contracts and Fixed Price is a Variable Rate Contract.
Fixed Rate Contracts tell how much each unit of work is going to cost but don’t specify exactly how many units because that is unknown. It may be pretty closely estimated, but that is not the same as knowing. Fixed Price Contracts often end up being variable rate because the amount of time and effort to do the job is different than what was estimated but the final contract amount does not change.
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 rate 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.
So, it isn’t a matter of size or length of time in business. It is a matter of knowledge and negotiation.
Replies
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Ok, Fred, I've got a good idea of what this is now I am trying to figure out how to propose it to a client. Would it be...Hello Mr./Mrs. Client, I will do the job for X amount of dollars plus whatever more it takes. Somehow I don't think that is how to approach it. any help on an approach is greatly appreciated.
*Steve, Home owner wants you to put in a sink with a disposal.Bid $2,500.00 You assume all risk/reward.Cost plus:Plumber: $200.00Elect: $200.00Carpenter: $300.00Countertop: $150.00Sink/faucet: $300.00Disposal: $150.00Misc. material: $75.00Sub-total: $1375.00Your fee=25%= 343.75total $1718.75Hope it helps.BTW. Fred, that was great! Mind if I copy that for use in my printed stuff for clients? Very good writing. Thanks
*Mark, please don't take this wrong, but no that didn't help. My question is how do I propose to the client that I won't know the total cost of the project until it's over?
*Steve, try the Richard Master of All method. Inundate the client with so much BS they'll never figure out that you had no clue what you were talking about. Eventually they'll sign whatever just to get you out of their house. Joe H
*Joe, LOL, but somehow that wasn't quite the answer I was looking for.
*Steve,Knowing how long it's going to take to do a job comes from experience. Experience comes from making mistakes.Of course, when working on existing structures, sometimes there are suprises...The way I deal with this is to bid the straightforward jobs as fixed price, adding an amount for contingencies. If things go real well, and I like the client, I will throw in an "extra" at no charge or for materials cost only.For more involved jobs, where there are possible minefields, I explain to the client that because of the unknowns I will do the job on a time and materials basis. I then estimate how long it will take with average suprises, and add a cushion. That's how long I tell the client it will probably take, but it could be more, or possible less. T & M is just a fair way to approach it, and most people will understand. Don't forget to mark up the materials to cover the time spent getting the materials to the jobsite.Most people are happy if you come in close to your estimate, so don't underestimate. "Underpromise & overdeliver" is a phrase I've heard. Good luck.
*Well, you have to have an idea.......a ballpark.A budget expressed by the Owner themselves is a best start. This method doesn't free you from producing an estimate. Some costs are fixed, #1, your fee, the % you will tack on to everything. Also, you know that a typical hook-up will take your plumber- 3 hours=$200. But...if the plumber takes only a hour, the Owner win a little. Same with the material. The Owner picks out a $30 sink or a $650 sink. Now, if the plumber takes apart the trap connector, and the waste arm falls apart in the wall all the way to lead swipe joint, hey! your off the hook. The Owner still gets a top-notch job and everyone, including you, gets paid.Any help?
*One thing that Fred left out, and rightfully so because it's not part of the cost equation but it is part of the process, is that bidding a fixed price allows the customer to decide on who to use on an apples to apples basis. Cost plus starts with the premise that the customer has either decided that he's going to use you no matter what you charge, or that nobody will bid the job fixed.So, if you are bidding against others, and the others are using a fixed price bid, the customer will likely feel more comfortable knowing the bottom line. If he's not comfortable with the ambiguity, then he goes with the other guy. Unless you convince him that its impossible to bid properly because of unknowns (such that he loses faith in a fixed price bid as the proper vehicle) or you can assure him (perhaps by price cap?) that your method will be better for him.Remember, the customer wants the job done at the end. Getting there is the contractor's job.SHG
*...i find it better for the customer and myself if i bid b fixed price for the job..... b with exclusions... for the portions that are questionable..b and allowances... for the areas the customer will make decisions for later..then state a method for pricing the exclusions on a cost-plus basis.. and a dollar amount for the allowances...the price still has nothing to do with which contractor is going to be selected... the contractor total marketing campaign is what will sell the job..if they want you and your product.. you are the one who will get the job..b but hey, whadda i no ?
*the litle buried line in the contract that says "hidden" things are extra can turn a "fixed" price into a not so fixed price.Understanding and conveying info to client is importent.See Mike Smith's post below.PS not disagreeing, trying to add info.
*Steve- To add to Mike's post:What you know is the fixed price and what you don't is an exclusion or an allowance. What you need to do to give the customer confidence is to make the former number much bigger than the latter. This comes with experience and work on your estimates. Time spent working on your estimates can make up for a lot of experience.
*25% was a figure plucked outta the air......a figure to do a simple example.....using simple math......
*Your mark-up method is appropriate for a fix cost agreement.-you take the risk, you deserve the reward.- In a cost-plus agreement, my understanding is you take the actual cost of a material and/or a service directly to the Owner. The owner pays that amount plus whatever percentage both parties agree on. What that amount is, whether it's 25% or 2225%, the contractor must factor in ALL overhead/profit. Anything else will be declared fuzzy math.Contractor will be branded a cheat, starve and die.So the contractor must work even harder at establishing and growing trust.The other thing I add in a cost-plus agreement is a consulting agreement which pays me a hourly rate for time spent with the client, chasing down research, subs, ect. And it pay for handholding.........and if the customer knows their paying for it, they tend to use that service judisiously.
*Mark: My original post got lost in the Deleted Day. The sincerest form of flattery is copying someone else. So, of course you have permission to copy.I think y'all are pretty well on in the Variable Price/Fixed Rate contract area. I use that term because they are essentially the same. You just need to know all your costs. Then being able to convert them to a percentage that will be applied to the expected job.So, I know my total costs to operate my business for the next year is $100,000(this is a SMALL business). I'm asked to bid on a job that I can pretty well see will take most of the year to do and will have a materials cost of at least $500,000(just to make the math easy.) So, I know that I must be able to negotiate a Cost Plus Rate of at least 20%.If the job takes less materials I will earn less money. But then I've got more time to find another piece of work. If the job takes more materials it should take more time too so I will make more money.Pretty simple example. But it shows the point.For jobs that are riskier because I can't even estimate the amount of materials involved I would go to Time & Materials. There I convert my $100,000 to an hourly rate. Using standard hours that would be $48.00/hour. So, I bill at materials cost plus $48/hr.The key to this kind of thing is having credibility, an accepted audit function so everyone can trust everyone else and knowin ALL your costs. Remember profit is one of your costs, overhead is another.
*I posted something the other day about this that was genius, sheer genius.Now it's lost. Gone forever.Oh well.Ed.
*I hate to be the bearer of bad news, Ed, but your genius was lost a long time ago.b : )
*Article about various types of contracts in the current issue of Professional Remodeler. Too large for one post. Will make it 3.
*That's why I don't post my genius...I don't want to lose it!Rich Beckman
*Files are too large according to Taunton, so scanned them using Omni Page and converted them to Word 6 (highest version I have in Omni Page). Please let me know if they can be opened.
*Whoops! Page #2
*Steve, I use an Excel spread sheet showing my mark up of 15% (my mark up on every job), I specify every column (i.e., lumber, man days, windows, dumpsters) being as specific as the architects drawing allows me to be. Then I hand them a "change order" form and tell them that if we dont sign at least one of these it will be the first time ever.
*I made a post the other day that got deleted. Basically the gist of it was that I am in the middle of negotiating a fairly large ($800k) job that I intend to do cost plus, and I figured that since this thread happened to be active at the same time, that I would post the events as they unfold.Friday I had a lengthy meeting in which I presented them with a design proposal, and brought up the idea of doing the job cost plus. My approach was to lay out the pros and cons of both fixed price and cost plus, which they responded to, and I they indicated that they would like to do the job cost plus, although it isn't a done deal yet.My normal time and materials billing is 10% over all materials and subcontractors, and my employees labor rate is their wage plus 65%. My overhead is 50-51% of my annual labor costs. The way I plan on billing the cost plus-fixed fee is to bill all materials and subs at cost, and then bill all of my labor at wage plus 55%, which will cover my overhead, and also provide a 4-5% cushion that will help absorb the cost of any mistakes that might happen (or end up as profit, if I get lucky).My profit will be derived from my fixed fee, which will be roughly 10% of the gross cost of the project.I'd like to think that I'm aware of most of the pitfalls, but I'd like to hear comments/criticisms on this approach. Forewarned is forearmed. Incidentally, I have read the articles that Sonny is posting and they are definitely worth reading.
*R.T."but I have not heard cost + 50% accepted by clients."Depends on the job, the client and most important, the way you sell cost-plus vs. fixed.There have been a couple of cost-plus jobs I've done with 90% mark-up. Most with only 33%. In all cases, I'm working for both wages and profit.For me, Cost-plus started to work for me when I started thinking like an Talent Agent. Client needs a service, you know the right people, you make what the owner can't, happen. You get a cut. When that talent includes yourself, that's a seperate deal and, yep, you get a cut!I think you can read a lot of books and such on the subject, but this is something I have learned my best lessons from just doing it, while insisting to the client, I will not lose money to benefit you saving money.Fred's thoughts bout audit-ready books/spreadsheets has kept things for me instantly clean. This is a relationship that can't foster any worms of doubt.
*If I understand this correctly, the cost+ method is the safe method for the contractor, and the fixed bid method is the safe method for the customer. But the tradeoff is money for safety.Fixed bid is safe for the customer in that he/she knows the price ahead of time, but the final price might have been lower if the cost+ route had been used. (Although it could go the other way...)The contractor is assured of making a given sum of money in cost+, but is locked out of the possibility of making more money. A fixed bid gives the contractor the opportunity to make a great deal more profit than he/she might convince the customer to go for in a cost+.Am I making sense? (could be the first time!)Rich Beckman
*Fixed bid is more like a wager, a bet. Your betting it'll get done just as you imagined, with a big reward for your risk. And for the risk, you deserve a big reward.Of course, you don't win all bets and a good sport takes his rare lumps and sucks it in and completes the contract with honor.Cost-plus, the Owner gambles that everything will go his way.........as so it goes.
*List of projects that can only be done cost+ :Major termite damage repairs.Major remodeling on older residences.Construction with little or no blue prints.Water damage and dry rot repairs.I guess all of these COULD be done on a fixed bid, but someone's gonna get screwed. Either the client pays for repairs antisipated by the builder that did not have to be done after all, or the builder pays for repairs he could not forsee before the construction begins.Cost+ is a great way to do business.We do 10% on material and subs supplied and there is about a 15% markup built-in to our hourly rate per carpenter.It's real easy to complicate this cost+ thing as you can see by RK's post. It's really very simple.Ed.
*Dallas, on jobs like that I give the people a spread. I tell them up front that there are some jobs that are impossible to estimate - and the reasons. Then I tell them that a fixed bid would require a very high contingency to cover possible problems. If all goes well I make a lot of extra money, but if things go bad at least I'm covered.Sooo, I tell them that I think it's more fair for me to give them a price of say, between $1200 and $1600, or between $4700 and $5800. That way they know the least and the most.I can't ever remember having anyone turn that type of bid down. I think they appreciate the honesty.
*Ed you are right on. Cost Plus and T&M are probably the simplest from an accounting point of view. You establish a "Plus" percentage or a "Time" cost per unit(normally an hour) and off you go.The client pays for all materials in either case. Most of the situations I'm familiar with the client pays for materials at Site Delivered Cost. No markup to anyone. That is the way it should be.Then the client pays either the Plus percentage or the Time amount according to the contract and your documentation. It is simple. Frankly I'm not sure why anyone would have a problem getting his mind around this idea. But, some do. They want to put markups on this and that specific line item. But none of that is necessary or appropriate. Remember, all your costs are included in the Time or Cost Plus number. If All your costs are covered then why nickle and dime the client?Another reminder: Your and your employee's labor, Profit, Overhead and Return on Investment are all costs included in the Cost Plus or Time number.But I'm not promoting any particular kind of bidding. All three have their place. Many times a particular job will require a mixture. Sometimes you will use all three on a specific job.
*Mark,It sounds like you have figured out a way to make cost+ equally profitable with fixed cost. Sounds like a great plan. My perception is based on what I have been told by cost+ contractors or contractors that work on insurance funded projects. In their cases if they put their resources to work on properly priced fixed cost projects they make far more profit than cost+.I believe your “talent agent” mentality has significant value and a source for your success. This may be the weakest link for others.Best of luck.........Richard Kaller
*There are many types of Cost + contracts. Can get very subtle and reporting/oversight intensive. Most consumers don't know the difference.Without a history (established relationship) I would be very hesitent to enter such a relationship as the client without some controls. This does NOT mean I don't believe the Cost+ or T&M aren't a good way to do something. It is sometimes the cheapest (as in least expensive) as has been pointed out. What controls? Situation dependent.Both parties have to understand what they are getting into (their commitment) and what is actually involved. (the guy standing around doing nothing, I'm paying for him? there can be a very valid reason. Will this have to be explained? each and every time?)My point, both sides have to know/understand the work to be done and why there are unknowns. Not the details, but how things can be inter related, and why things can be hidden.
*Good point bobl about the "guy standing around doing nothing". It will drive a customer livid if they observe any waste, on both time & and material. Come to think of it, the picture pisses me off also........
*Part of my point was that the guy may not be 'doing nothing', but waiting. which while they are doing nothing, they are not goofing off. This perception must be managed. If the customer thinks they are getting ripped off in one place, they may think it is everyplace.Magement of time and materials is always importent(nobody knew that, right) but in when case (cost+)it effects the customer directly $ wise and the owner reputation wise, in the other (fixed price) the owner directly in both $ and reputation.
*A while back, one of our superintendents and I were standing around talking about the best way to approach a certain problem we had run into on a remodel. After about 20 minutes of deciding the best way to resolve the problem, he went back to work.Later that day, I got a call from the builder we were subbing from complaining that he didn't want to pay by the hour for us to stand there and shoot the breeze.I gave him an education. He apologized but I could see in his eyes a certain distrust. We finished the job and now when he calls for help, we're too busy.I've got no use for paranoid clients.Not everything we do makes saw dust.Ed.
*Yes it does, but up here where no one can see it. Just the results.
*
I thought George's questions deserved an answer that wasn't lost in the morass of commentary.
George:
Back to your original posted question about Cost Plus or T&M(Time and Materials) vs Fixed Price when bidding a contract. Another way of looking at it is that Cost Plus/T&M are Fixed Rate Contracts and Fixed Price is a Variable Rate Contract.
Fixed Rate Contracts tell how much each unit of work is going to cost but don't specify exactly how many units because that is unknown. It may be pretty closely estimated, but that is not the same as knowing. Fixed Price Contracts often end up being variable rate because the amount of time and effort to do the job is different than what was estimated but the final contract amount does not change.
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 rate 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.
So, it isn't a matter of size or length of time in business. It is a matter of knowledge and negotiation.