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We are renovating a townhouse in Washington DC for six-figures-plus and have settled on a contractor whose work we really like. We used an architect, a budget and got a preliminary estimate from the builder that was in line with our expectations. I have a couple of questions about his cost-plus contract, however.
He wants:
1. $20,000 up front for labor/materials that comes out of the back end when the project is done. (I assume this is so he doesn’t have to chase us for the final bill).
2. 20 percent for his fee paid with the biweekly invoices of labor and materials. Subs are working on fixed-contract basis.
My issues:
1. Can there be retainage on his fee in a cost-plus contract so that he has an incentive to finish the job?
2. How can one build in a budget process so we make sure the budget is in line as the project progresses. (I don’t want to be hit with a surprise cost overrun).
3. Can we build in an incentive for him to come in within the estimated budget or are we just shooting ourselves in the foot. ie, corners will be cut to make the incentive.
Any thoughts you folks have on this would be welcome.
Thank you,
Sam
Replies
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Well this is a remodel. The fact is that for a serious remodel you never really know what the job is until demo is done. A lot is hidden by the walls. So, I would kiss good bye any hope of coming in on budget. You should expect cost overruns for unexpected problems you encounter. If this were new construction you could tie down the bucks. Don't even try for a remodel at least until the walls are open.
What you should expect is a schedule of costs and a negotiation method for figuring out what to do and how much it is going to cost when the problems come up. You should also look at the contractor's business record as well as the quality of work. Most are pretty good. But, like anything else, the unethical or inept can create a nightmare.
Just reread your post. Washington DC? Seems to me from what I've read a low 6 figure remodel, depending on where it is, may not be much. I mean a $100,000 remodel in lots of places is merely cosmetic. So, how about describing about what you are having done?
*Sam,He wants:1.A down payment is ordinary and expected,as you should finance your project,not your contractor.This allows the contractor to fund the project and place orders for materials and down payments to the subs as necessary.Normally,I would then present the invoices against this balance,accounting for it in the project,and continuing to use it to fund the ongoing project.See #2...2.20% is fairly common-refering to #1,this is now the money that the contractor has earned,and gets to pocket;the 20% down is still funding the project.Your Issues:1.A retainage on his fee in effect means that your contractor is not making a profit during the course of your project and will not realize a profit until the end.There are several ways to provide for incentive on the contractors' part:One is with a cost plus fixed fee arrangement,you might ask him about this possibility;Another is to offer to split the difference with him if he comes in under budget and on time.(This assumes change orders to be seperate from the budget).2.Keep an eye on the invoices;ask your contractor(Who has a reputation as an ethical builder,I hope) how you are doing in terms of budget.Can't think of anything better at this point.3.See #1 above-If the contractor builds to your architects specifications,there should be no corners cut in any event.Making sure your contractor is someone you can trust is very important always,and even more so in a contract of this nature.Maybe you would feel better taking firm bids...?A whole 'nother can o' worms...Hope this helps..JW Heck,JW Heck Building Company
*Mr. Fromartx, both Fred and Jim posted important concerns.It's crutial that you verify the integrity of your contractor. Also, as the others mentioned, I cannot emphasize enough that not one, and I mean not one, contract ever came in at the contract price. The larger the dollar amount and the more details of the remodeling involved, the more Change Orders will be initiated, both by the items exposed during the process and the changes you will want as you see things develop. Plus, your building dept. may mandate changes once the demo is done.I never ask for labor monies up front, but do for any and all materials, plus those deposits our subs may require. That's pretty much standard.I've never understood the purpose of retainage in residential projects. Certainly, as the work is being done, and the project progresses, one can see if something is being done wrong, plus you have the building inspection approvals of all phases, plus you have pay out phases. Usually, of those who asked about retainage, their reasoning was just to assure things were done correctly and to assuage their anxieties. I said sure, then from my perspective, since I've not taken a credit report on you to verify your capability, or intent, to pay, how about giving me a 50% deposit so relieve my own anxieties? See, in large remodels, in effect, during the process of remodeling I'm extending credit to the client.Remember, this is a partnership for a specific purpose and for a specific duration. The contract fit and "procedures" must be fair to both "partners." And no ambiguities.Finally, as I tell our clients, we do not have the luxury of an R&D Dept as factories, not their ability to refine and test market their "proto-types". Nor the ideal environment of a factory setting. We must bring our man power, equipment and materials to your home, and build out "proto-type" under your watch full eye and under what are really conditions under duress. And we have only one shot at it while trying to make our own 5% - 10% net profit. Try building a $100,000 custom designed car under those conditons. So be prepared for Change Orders. They are a normal part of the process of building proto-types in this un-natural environment as manufacturing per se.One more thing. I've never seen a set of architectural plans yet for a remodeling project that "didn't" have errors or items that were missed or not accounted for. Whoops! Another Change Order.
*James, this sounds interesting but I'm not sure what it means:"There are several ways to provide for incentive on the contractors' part: One is with a cost plus fixed fee arrangement, you might ask him about this possibility" (you mean his fee is fixed rather than a percentage?)"Another is to offer to split the difference with him if he comes in under budget and on time.(This assumes change orders to be seperate from the budget)." (You mean if the job costs $10,000 less than expected he gets $5,000?) I think the point I hear most is about ethics and trust. And on that score all I have is his former clients and my architect who has worked with him before. I feel he is honest and trustworthy.As for cost overruns, I've heard the point about you never know what's behind the walls -- and I can understand that, which is why we agreed to cost plus. I figured that in a fixed bid, the unknowns would be tacked into the contract as a generous percentage in any case. Fred, As for the job, it's a townhouse with two room areas on each floor: dining room/kitchen on ground floor, living room on 2nd floor separated by a fireplace structure in the middle; two bedrooms on top floor with bathroom between them. Its about 1,800 sf.The job:Ground floor: new kitchen, remove 1/2 of a bearing wall to open up kitchen to dining room. Replace glass wood doors to yard. New small powder room in brick shed attached to house. Window between shed and house turns into a doorway. New storage beneeth stairs.Second floor: 3 glass/steel pocket doors to close off 1/2 of living room (hard to explain without a drawing). Add tile shower area to half-bath where a washer/dryer is. Move washer dryer to third floor.Third floor: redo existing 6x6' bathroom: new tiles, tub, vanity. Wall off new space for washer dryer stack.Refinish old pine floors in top two floors, paint whole house. Refinish teak tile floor in dining room. Lay slate floor in kitchen.
*Sam,Fred makes the most important point in his first sentence. Remodeling is the big unknown. This fact can be fun or terrifing. The only way to make it fun is to realize changes are going to happen.Most of those changes, if everything is designed reasonably well, will come from you. It's fun (or it should be) to see your project develop and have the ability to change your mind.Fred's, James' and Sonney's points try to address this reality. If you have things your way, Your builder will have to keep everything to the letter of the specs.The way he has it set up, your allowed to change your mind. As for a bonus, Everyone I've every done one of these deals for is broke at the end. Offer me a bonus, I'll take it, but I won't count on it.Luck
*Sam,"There are several ways to provide for incentive on the contractors' part: One is with a cost plus fixed fee arrangement, you might ask him about this possibility" (you mean his fee is fixed rather than a percentage?) Exactly.The idea here is that you are purchasing the contractors' services for a fixed price.This price is normally determined to be a percentage of the budget,the contractor will estimate the time necessary to complete the project,and charges you a fee for using his company for that time,and no more.He will be trying to recover his profit and overhead for the time that his resources are tied up on your project.The incentive here is that after making this agreement,the more efficiently and quickly he can complete the project and free up his resources,the more net profit he makes.He is rewarded for efficiency and actually is penalized if the project takes much longer than estimated,as his "plus" is fixed.The client pays for all construction costs as normal,same accountability,the fee is prorated along the project.As soon as the fee is gone,the contractor wants to be done.Now the client knows that the contractor is not dragging out the job,no gain in it for him."Another is to offer to split the difference with him if he comes in under budget and on time.(This assumes change orders to be seperate from the budget)." (You mean if the job costs $10,000 less than expected he gets $5,000?) Again,the contractor is awarded for efficiency.If your primary concern is one of cost control,and if you were agreeable to paying the budget estimate to begin with,wouldn't you feel it was fair to reward your contractor $5,000.00 if he saved you $5,000.00?(To use your $10,000.00 example)The only way he can accomplish this would be with a sustained effort to be efficient.The incentive.All of this again does not include change orders.In both arrangements,change orders would include additional fee,and in the second arrangement would also include additional time to complete.More work=more fee and more time.Remodeling can be very stressful for all involved,and these two arrangements give the most flexability to the owner,as well as the fairest compensation to the builder.You should get what you pay for,and he should get paid for what he does.I have used these types of contracts for many years,as I feel they are the most equitable that we have available.You are correct in observing that a fixed bid would have to allow for every contingency,and you might end up paying for more than you get. From the contractor's standpoint,the work is too hard to risk not making a profit.Luck,James
*SamWhat you have with your contractor is a cost plus a percentage of costs contract. The greater the cost, the greater the fee.A cost plus fixed fee contract provides a set fee. No matter how high the costs the fee remains the same.Avoid the advice on setting a certain budget and splitting the difference with the contractor if costs are under that budget amount. Such a situation only leads to the contractor thinking of himself and how he can screw you and those who furnish labor and materials.
*Remodeling. Plan on 20-30% higher costs than planned on! Safe way...either set a budget, and if possible....set 20-30% of that in an accessable account....or scale back the project by 20-30% and put the moneys left over into an accessable account. Unforeseen conditions, code updates, and most of all...client change orders, updates, and may-as-wells will create this 20-30%. Alot of it being 20 or 30% will be the age and construction of the original building...and how much the original building is disturbed. The rest, if your contractor did his job....will come from the customer changing and/or adding to the scope of work. Jeff
*SamFrom your post, there are three components to your project. First, the contractor is getting 20 per cent of the cost of labor and materials. Second, the subcontractors are not getting a percentage of the cost of labor and materials, but rather a fixed fee. And third, you have the cost of labor and materials.If your subcontractors had operated on a 20 per cent of the cost of labor and materials like your contractor, then 40 per cent of your budget would have been contractor fees and 60 per cent for labor and materials. That seems high to me. You want to put most of your funds into good materials and quality labor.Make sure that the workmen employed by the subcontractors and the material suppliers employed by the subcontractors turn in proper invoices for the labor and materials supplied by them. The 20 per cent you are paying your contractor is based on those amounts. The fixed fees to the subcontractors are separate and the contractor is not entitled to a percentage of those fees since they are not labor and materials.
*Thanks for the info. You've gotten some pretty good advise on the contract side of it. But, consider this. You are making both cosmetic and basic structural changes to the town house. That means that it must be brought up to current code in the process, at least I think that is true throughout the continent. So, you really don't know how big the job is until you get the place opened up and are able to inspect it.So, why not do it this way? Break the contract into two phases. First phase is the demo and inspection phase. Contractor does this either on a Fixed Cost, or a Fixed Fee Plus Cost basis. You agree on a schedule of charges for the actual remodel.Second phase is the remodel. You, your architect and the contractor agree on what needs to be done. You apply the schedule of charges to the Schedule of Tasks and go for it. Payment schedules are always a tough bone. They are because everyone wants to hang on to their money or get the money sooner. I'm comfortable with anything that guarantees to the contractor that you are, in fact, able to pay the bill. No decent contractor wants to take the chance on getting stiffed in the end. Nor, does he want to starve while the job is going on.So, why not pay for phase one in two lumps, beginning and end. For phase two pay materials as purchased and the fee in three lumps, 20% up front, 30% half way and then the end. Subs are to be paid as the costs are incurred based on presented bills.This gives you control, gives you a chance to quit if the job is too big, gives the contractor his money and makes sure subs are paid on time.Now, it is your turn to see if you can keep the right attitude about the big adventure!
*Thanks all for your thoughtful advice. I will let you know what we decide in the next week but off the bat I think the fixed fee idea makes a lot of sense. Fred, I negleted to mention the house was renovated in 1972, nearly gutted, so many of the systems as far as we are aware are to code. There are of course some unkowns behind the walls in terms of some duct work. We were also permitted by the city on the architectural plans already.Again, thanks to this group for all the advice -Sam
*You can open walls now and end many mysteries...I am always asking to do this...near the stream,ajI would be wary of unlimited unknowns...
*Ditto, AJ.You can save yourself alot of grief and misunderstandings.Billy
*Sam, I have negotiated one "cost plus, not to exceed" contract. I basically figured my budget and then doubled it. We then agreed to split the underage. There wasn't any and I was thankful that I doulbled the cost going it.The idea basically trumps the original idea of getting the homeowner to pay for everything, like they should. But the homeowner tends to get too scared to enter into a cost plus contract even though their can be substantial savings because of them. After all, you must be aware that contractors assume the worst on fixed bids and pocket the difference between the worst and best scenarios.Try asking for a cost plus not to exceed contract. You might spend a little more but the peace of mind might be just what you need.blue
*This is a little late, most likely.In a a contract what both parties agree to, is what you have. The hard part is being fair to both parties. The contraact writer usually protects themselves the most.The thread doesn't explain much, but how can the specialty subs bid fixed price? Bids after everything opened up and the work can be defined? Therfore unknown, so cost plus?Watch the plus percentage fee profits. The more it costs, including the GC's mistakes, there's profit.Working cost plus is an art form, particulaely for the buyer. Knowing what info to ask for and knowing what isn't significant is somrthing only experience can help you with. You can mire yourself in data or you can skip over important stuff.Cost plus - buyer riskFixed price - seller riskCost plus can be the most cost effective way to do a job.Lots of variables If your paying biweekly you shouldn't need a big deposit because you're probably making payments before the GC is billed.Lots of variablesMany assumptions on the statements. Lots depends on GC's business methods.
*I like AJ's idea about ripping the walls open before starting. I have made similar suggestions myself.Clients understandably want a fixed cost on a project. Generally that is what a bid represents. The number one reason why it escalates? The client.Fact is, customers never want less than the specified amount of work once the job starts. Further, customers will make changes even to the smallest job, its inevitable. I get the old can we put a door there?, often, and then I got to frame it, trim it, paint it, etc. That costs money, and you're paying.Personally, from a contractor's perspective, little good can come from cost plus contracts at least for me. I cannot bill labor high enough or make my margins. Clients tend to watch the clock more on these jobs. I tend to drive my guys harder.Having said all that I am doing a cost plus job this year, but there are special circumstances. Oh yeah and I did a big one last year. In the end, terms in any agreement have to be negotiable by both parties. Contract negotiation, not contract ramming it down someone's throat. Hey Ted, 40 percent in contractors fees and overhead sounds right to me. Aren't the subs entitled? Shoot the gov't gets more than that and they can't do anything right.
*What's the point in doing a cost plus not to exceed? Just do a fixed cost and make it so high that it covers every possible thing and then the contract prices is yours even if all goes well. A not to exceed contract just never made sense to me.I can handle a cost plus contract, and do them all the time. Louis
*I do 90 percent of my work on a time and material basis(labor plus materials I 20%). I believe that it gives my clients the best value, and also control of their money. In this age of big bow stores, I try to sell my service, since most of my clients think that they can get materials cheaper than me. I also think that a time and material contract eliminates some of the animosity that happens on a fixed fee contract. I believe that we end up playing on the same team, so to speak, instead of being adversaries. It is not the perfect match for everyone, but works well for me. I can also get very close with my ball park figures to start, but all my clients make too many changes to hold me to those prices.
*david .. et al...cost plus only works for us as contractors if we have correctly identified our COSTS..what does the 20% represent ? is that your company's profit ?if it is overhead and profit.. you'll go broke..in a true cost plus contract.. the cost will include all of your overhead associated with the time span of teh the contract..for example: if you have 1800 hours of billable production time in a year... and the contract you are doing takes 25% of your work schedule for that year... then the job has to carry 215% of your overhead...including your production hours... ( what ever they are)... plus LABOR BURDEN.. plus overhead.. usually means that you have to charge $30 to $45 per hour for your labor rate...at those levels... the customer starts to balk when your crew takes a coffee break..... or anything else tehy think is non-productive....when public contracts go to "force account" or cost plus... every paper clip, phone call, fax machine, niut and bolt is part of the cost...is it part of yours?
*In my world there is a defference between a time & materials and cost plus. While the result in a good relationship/experience is the same, when things go sour there is a world of difference.
*When I have done a cost + fixed it is based on a certain estimated amount. If the customer should up the scope of the project, I have it written in the contract that the "plus" will increase proportionaly. That way I am not doing all the extra work for no profit.That is why I believe that the cost + % is a better way to go. From the contractor's point of view, there is no possiblity of losing money if you are using a properly calculated profit. From the customers view, they are getting exactly what they pay for, not bulking up the cost for unforseens as done in fixed price contracts. Cost + % requires trust on the part of the customer, and that can only be earned with a good past history. It makes the contractor totally accountable for what happens. And, the best parts of it is that less overhead time going into the contract is required by contractor, as precision to the nth degree is not required, allowing for the estimating to go quicker, as well as the fact that change orders are not needed. If a decision is made for a chabge by customer, I will give them an approximate cost and begin the work.the percentages I use are 15% for near or over 100K jobs, 20% for over 40 k, 25% for over 15K, and only a fixed cost for anything under 15K.More muddle for the mind.Jim B
*bobl... i don't care what you call it....does T&M include all of your costs or not.. if it doesn't ... you're subsidizing your customer...
*Louis, I did one cost plus, not to exceed. I wasn't willing to do a set fee. He wasn't willing to do an open ended contract. We were talking about a $5,000 half bath remodel. Theortetically, that half bath could end up in the million dollar range with an open-ended contract. We agreed with a cost plus, not to exceed and to split the difference between the expected contract price, and the top end. It served as a reward to me to keep the costs down and accept the risk. The price was high enough to cover all possible situations.I ended up using every penny and there was nothing to split. We didn't go over however because it was bid on the worst case scenario and then doubled.I got the profitable job, while the other, non-flexible bidders lost out. The client understood the risks and appreciated the chance to save a little if it was at all possible. It wasn't.blue
*BlueWhat would have happened had you exceeded the not to exceede price? Then who would have lost? Who really holds the cards in this scenario?This one worked out for you but others may not. Louis
*Mike Smith,In my world on a T&M you are delivering labor hours and materials.On Cost plus you are delivering a product at a price that is soft. In other words, on T&M you work 80 hours you get paid 80 hours at the agreed to rate. You deliver 8 sheet of plywood and 30 2x's, you get paid for those, if the product is useful or not. Cost plus you are suppose to deliver a product as agreed to. If I want a dog house under Cost+, you are expected legally to deliver a dog house, even if the cost of building it went up or down. T&M, you provide the labor and materials, if you what you build as a dog house isn't suitable as a dog house, you still delivered what you contracted for, labor and materials. Good relationship etc, it doesn't matter. Things go sour, what the contract calls for can be the difference of winning or losing in court.All pricing should take into consideration overhead etc in insuring that your cash outflow is covered. This can get tricky if you haven't decided on your pricing schemes, know your overhead etc.Getting into soft situations and trickey/complicated contractual relationships is easyily turned into disaster. All the different types of contractual types (including those fixed price variations different from firm fixed price, which is what is normally discussed here) have advantages and disadvantages. Getting both sides to understand what the risks are and which type to use is not easy in the residential market. Also, what information might be needed in the alternatives (from firm fixed price) can be taken as offense by those not familar. Too much information can also be asked to be provided.
*ok, bobl... good answer..too many in the trades think they are covering their bases with T&M..when they are really just twisting in the wind because they ARE NOT covering their costs...lessons learned the hard way...from my early days doing cost -plus.......
*Hi MIkeI agree with you! A contractor does need to cover all of his costs when he does a cost plus job and it is possible to do a T&M job and cover all your costs.And your right 20% does not cover your costs!!When I do a cost plus job or a T&M I take all of my costs into consideration.I have a question. Are all contractors just scum of the earth and all are looking for any opportunity to take advantage of unsuspecting consumers? Are the contractors that post here like this?Louis
*Louis, we would have lost if the job went over. That is the same situation that a fixed price offers. The cards were held, and played, before the first nail was driven. I/we pretty much knew, from experience, what the worst case scenario was. In this particular situation, the superintendent hired his friend, the plumber wannabe, and told him the situation, basically telling him to use it all up. If you can't make a cost plus, not to exceed work, you probably shouldn't be giving fixed bids either. blue
*Louis, what's with the scum of the earth question?What does taking advantage of unsuspecting consumers mean?blue
*>Louis, what's with the scum of the earth question? >What does taking advantage of unsuspecting consumers mean? Some of the posts make it sound like a customer could nor possible trust a contractor to do a T&M or a cost plus job.I have news. I have customers who only want to do cost plus jobs because they trust me and I trust them. What a novel idea. And I make money on these jobs and I cover my costs.
*Louis, If you go back and read some other threads, the customers are all scum bags. Some of these threads talk to bad experiences. If you take them out of total context the picture can appear to be bleak. These bad experiences help identify the risks.When you are deciding what type of contract (fixed price variation, cost variation, T&M), the various risks associated must be understood, by both parties. In that situation and a good relationship, all things are possible.The best contract is a hand shake and a smile. But the human factor enters and then ....
*boblI know there are bad customers. I don't have my head in the sand. I just think when two parties are entering into a contract together there needs to be mutual respect. If a contractor approaches business believing that all customers are scum then the customers he attracts are the customers that believe all contractors are scum. What kind of a working relationship do we have there?Have I had bad customers? Yes! Many? NO. I have been in business since 1981 and have had 3 bad customers. Does that make all customers scum? I don't think so!Am I careful writing contracts with clients? You bet, that's good business practice. Do I understand there are risks? You bet. Do I minimize the risks? You bet. Do I treat customers like I would want to be treated? Yes.Louis
*Louis,I noticed that you have been in business since 1981,which was the year I started my business. It's been good and bad,always interesting,and we've learned a lot haven't we?You obviously have valuable insights to offer to this board and I hope you continue to post here.Continued success to you...jw
*Louis, Think we crossed wires. I agree with you. Was trying to respond to your comment that the thread seem to put down contractors. On some of these threads someone often gets the short end. there is no general bias against anyone, even though it sometimes apears that way. Just trying to point out that. Stick around for a few months and see. Want some real opinions, join the woodshedbobl
If we as contractors have accurately identified our costs, there should be no need for a cost-plus contract. With detailed specifications, why not always shoot for a guaranteed price? I know its different in other areas, but around here (indiana) I have seen very little in the way of cost-plus large scale remodel work.
Seems our clients prefer a fixed contract with a few allowance thrown in to allow flexibility of selections.
How many of you all work on cost plus? Just curious.
On smaller jobs, i can see a place for cost plus. But, for high-end, large scale remodel, I cant see the consumer having confidence in that.
Any thoughts? I dont mean to hijack, just got me thinking a bit.
I work remodels t&m almost exclusively. Never have seen what I'd call a set of "detailed specifications". Every remodel is different and there are always unexpected opportunities to enhance the project that no one foresaw. Why make those opportunities into negotiating sessions? Or worse, avoid them because they weren't "in the contract"?
A fixed price puts you on one side of the table, the home owner on the other, instead of working together to fulfill the customers dreams (with their money). In my mind it's the difference between selling a service and a (imagined) product.
As to what you consider "high-end, large scale remodel", I guess those are relative terms. I'll leave that to someone else to define. But I will say that square dealing is square dealing - whether it's a 10k job six figures. Maybe it's just me, but I can't remember the last time a customer didn't agree to tackle their project t&m.
Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
It's not just you Jim, though we are surely odd in the BT scheme of things. We do not just charge by the hour, so that whatever it ends up is the price. I give a cost spread after knowing the parameters of the project. And not a spread that will leave the homowner open to almost all unknowns. We've been at this for a while and can foresee and allow for problems in advance. But hey, we could be wrong.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
(Hey! Those were three great games! Glad to make it out of that town with our arses intact. On to Baltimore. Good luck the rest of the way)Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
We plod on, unloading some contracts.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
We are going to do a phase remodel of a ranch house with incredible views. Our GC is a wonderful man and tends to under charge. We want to pay him and his crew fairly. I have always paid cost plus labor and paid as soon as I was presented with a bill. We have built and remodeled two homes and have always had wonderful relationships with our contractors and subs to the point they are family friends.
We will independently contract out some subs but if Chris hires a sub isn't it the right thing to pay him a percentage of the subs total cost. What would be a fair percentage? Currently Chris and Joe do all the work and charge $30.00 per hour which is probably too low. Would it be more fair to pay him more per hour or labor plus a percentage. We have realistic ideas of costs and expect to find lots of costly surprises (although none that are castastropic) so we always do cost plus labor.
While we want to remodel this house, our priority in considering cost is paying people fairly for their work and risks. Any help would be appreciated.
"our priority in considering cost is paying people fairly for their work and risks. Any help would be appreciated."rules of thumb, fixed price risk on seller, cost plus risk on buyer.
bobl Volo, non valeo
Baloney detecter WFR
Well bobl, that was certainly a non-answer to the question.
hrv - I would have a talk with Chris. Sit down sometime before you start work ... pick a time when things are quiet. maybe over pizza and beer one day. Tell him what you have in mind, and if he doesn't have any suggesstions, try one of these: a flat 10% of the sub cost, or ask him to track the number of hours that he spends with that sub, and then pay him his hourly rate. I suspect that a percentage might work better.
Do the same thing for any owner-supplied materials. Like if you select and pay for a certain toilet or light fixture or special floor tile, offer to pay him a markup for going to pick it up and coordinate the installation.
BTW, in the future you might get better response if you start your own thread, rather than adding on to an old one.
"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
"our priority in considering cost is paying people fairly for their work and risks. Any help would be appreciated."rules of thumb, fixed price risk on seller, cost plus risk on buyer.""Well bobl, that was certainly a non-answer to the question"in a Cost Plus contract the contractor has minimal riskas someone here said risk = reward, little risk ....
bobl Volo, non valeo
Baloney detecter WFR
Fasteddie,there are a million ways a Cost plus contract can be worked, trying to cover all of them in a series of posts here is impossible, lots to consider including the contractors accounting methods, how they work, and how much the buyer wants to be involved.I covered one point in my post "risk"
bobl Volo, non valeo
Baloney detecter WFR
No, my point was, the first-time poster asked a legimatite real-life question, and you answerred with rhetoric. You are, however, correct in what you said. But, the poster was looking for advice on how to deal with his contractor. My response might not be the best, but it is one way to work it out.
"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
what you consider rhetoric, I considere a basic tenet of contracting
bobl Volo, non valeo
Baloney detecter WFR
"asked a legimatite real-life question,""the poster was looking for advice on how to deal with his contractor."let me ask you this, what GC doesn't know how to markup their labor, subs or materials?The description of the ralationship after going back to reread it is T&M, not a cost plus.Have no idea where this work is being done, but $30/hour withan apropriate markup for O&P is less $20/hour wagesreading these boards a number of folks get asked to do cost plus or T&M and don't know how to handle it, but in this case the buyer is apparently trying to figure out how to do the contracting.going on the assumption that it is T&M then you have to learn how the GC normally does his markup on his contracts, does he use Proof or does he cover his overhead by charging on martials. If it is the latter than the markup should be more like 30%-50%, but that depends on what his overhead is.How many jobs has this guy going at once? should he be charging actual time to get material, or if he is getting material for more than one job at a time, how's he going to charge? the effort is described as a phased remodel, where the GC ain't the GC for the whole remodel, but the HO is.
bobl Volo, non valeo
Baloney detecter WFR
If you have a good relationship with your builder, I wouldn't monkey around with it too much. It is all well and good for everyone here to give you advice, but you already have it figured out. Not too many of us can say the same.
I have some very good customers that are based on a similar relationship. When we talk price, it is only for informational purposes. They will pay us for whatever work is necessary. In turn we will look for the most sensible way to achieve their goals.
If you want to pay him more, suggest an increase in his hourly rate. But don't push it. Another option is to contribute to his favorite cause. Fire department. Local hospital. It is really up to you but always keep in mind that what you are doing is already working. So don't muck it up.
Thanks, for you advice. I wasn't trying to treat him like a child, but I was brought up to pay a fair salary for fair day's work and on time.
I agree with smslaw. You say he undercharges, but that's his business decision. He may find that he gets great references, so he's never out of work, or that people are less fussy if you charge less, or whatever. In either case, I suspect he's paying his workers and putting food on his table.
You say you were brought up to pay fair wages, but what about the GC? Perhaps he was brought up to charge what HE considers a fair price. Maybe his parents always told him never to price gouge, and that's how he's built his business.
Personally, I think I'd repay him by giving him great references, paying him on time, creating a warm work environment, etc. At the end of the project, if I really had to, I guess I'd ask him if he'd accept a bonus. All this other minutia of trying to figure percentages and such seems like you're trying to tell him how to run his business, and will probably drive him nuts.
Yeah. This notion of what's "fair".
I think what's "fair" is what both parties agree to. It doesn't have to be any more complicated than that. Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
Okay, I agree I was wrong to assume he undercharges.
Have the work done according to his methods.If the work exceeds your expectations, as was previously mentioned consider giving him a bonus at the end of the job;A well-written letter of reference.
A gift certificate for a nice restaurant.
A gift certificate at a tool store or a box store.
Concert/theater/sports tickets.
A fist full of cash.He's charging anough to make a life for himself, his family, and his employees. Don't possibly offend him by trying to impose your standards upon him.Good intent, but in this case, possibly the wrong execution.
Edited 7/29/2006 12:25 am ET by Mongo
Somehow I confused readers, my GC is a friend, artist and contractor we have ben through the renovation of my parents' house and soon my house. I would trust him with my soul.
I assume your contractor is a mentally competent adult who has figured out how to run his business. Don't treat him like a child and don't treat him like a charity case. If you have agreed to cost-plus, by all means pay him promptly but treat the relationship for what it is, a business transaction. If you need to spend more money on the project, make it bigger or use better materials.
If you need to spend more money on the project
Roar!SamT
*
We are renovating a townhouse in Washington DC for six-figures-plus and have settled on a contractor whose work we really like. We used an architect, a budget and got a preliminary estimate from the builder that was in line with our expectations. I have a couple of questions about his cost-plus contract, however.
He wants:
1. $20,000 up front for labor/materials that comes out of the back end when the project is done. (I assume this is so he doesn't have to chase us for the final bill).
2. 20 percent for his fee paid with the biweekly invoices of labor and materials. Subs are working on fixed-contract basis.
My issues:
1. Can there be retainage on his fee in a cost-plus contract so that he has an incentive to finish the job?
2. How can one build in a budget process so we make sure the budget is in line as the project progresses. (I don't want to be hit with a surprise cost overrun).
3. Can we build in an incentive for him to come in within the estimated budget or are we just shooting ourselves in the foot. ie, corners will be cut to make the incentive.
Any thoughts you folks have on this would be welcome.
Thank you,
Sam
It’s a very interesting case, but according to me this is purely in favor of the contractor. First of all client should select the type of cost plus contract, As per the PMBOK (Project Management Book of Knowledge) there are four different type of Cost Plus Contracts, i.e. CPFF, CPIF, CPAF and CPPC
· Cost Plus Fixed Fee Contracts (CPFF) : I these contracts the contractor is reimbursed the actual cost of performing the work and a fixed fee. The fixed fee is calculated as % of initial estimated cost. Fixed fee doesnot change with the actual cost (The current case)
· Cost Plus Incentive Fee Contracts (CPIF) : In these contracts the seller is reimbursed the actual cost of performing the work and the incentive fee. The cost is based upon the performance of the contractor, performance is determined based on the pre defined performance targets as (foundations, brick work, plaster, ceiling, electrical, Mechanical)
· Cost Plus Award Fee Contract (CPAF) : In this type of contract all the cost of performing the work is reimbursed plus the incentive is given to contractor based on his performance. the point to note is that subjective evaluation is done for contractor's performance and that is not feasible for this case)
· Cost Plus Percentage of Cost (CPPC) : In this contract the cost of performing the work is reimbursed plus the percentage of actual cost of completing the work. % is pre-determined like here it is 20% but fee will vary on the actual cost
Yet it is not clear in the statement here that the 20 % value is based on CPFF or CPPC i.e. is it on the estimated cost or the actual cost, however it is favorable to keep CPFF as otherwise contractor will try to increase the cost of project in order to keep his profit high, the most favorable here in my opinion is the CPIF where the cost of saving is shared between contractor and client and also an incentive is given to the contractor for finishing the job early. The ratio of saving or loss is pre-determined whereas client has to pay fixed portion of profit to contract in any case so in this case it can be 10% of the actual estimate Plus the incentive of saving
It is favorable in my opinion to pay the profit to the contract based on the actual invoicing status not as fixed monthly of weekly
Client can pay 20% advance and can deduct this in timely manner for all the actual invoices with the same ratio, where as here the client can keep the retention money from the profit of the contractor