I am a homeowner. We are embarking on a $650M expansion of our house (the biggest financial decision of our lives). We have found a contractor who’s work we love. His references indicate he has a good reputation. I highly value the level of trust we have in him.
HOWEVER, when it comes to substantiating $$, I feel that his costs (subcontractor and material) should be an open book. We are paying a 15% markup on the total. If this is not an unreasonable request, how do I bring up this subject while maintaining mutual respect? And how do we go about truly verifying his costs?
There has to be a fair way to go about this. Thanks.
Replies
If you are doing a true time & materials or cost-plus job, then the invoices from subs and material suppliers should be available for your inspection. When I do this I make the invoices available at my office--I do not copy them and give copies to the client with the weekly invoice (unless it's a tiny job and there are only a few). On the billing the charges should include itemized listings of sub/material costs with an invoice number next to each one.
Charges for the contractor's crew's labor should be at contracted rates, i.e. lead carpenter $55/hour, midlevel $45/hour, laborer $35/hour, and timesheets for each should be available for you to review. I have done it where timesheets were kept in a binder on the job and the owner could inspect them after we left each day.
I'll say it and I'm sure others will... 15% is not enough and your contractor is skating on thin ice as far as I'm concerned.
Edited 4/20/2004 2:19 pm ET by davidmeiland
You're likely to get an earful on this one. This board is pretty heavy with contractors, and they tend to take something like this personally.
I can't imagine why anyone would think a contractor's expenses and costs should be "an open book". How would you feel if I walked into YOUR business and told you to show me your costs before I bought anything?
Don't take advice from fortune cookies.
They are in the eyes of a micro-manageing control freak...Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming.... WOW!!! What a Ride!
They are in the eyes of a micro-manageing control freak...
I'am not sure that that is a fair assumption in this case. True some folks just want to scr@w everybody; but the last couple of lines in his post is:
"If this is not an unreasonable request, how do I bring up this subject while maintaining mutual respect? And how do we go about truly verifying his costs?
There has to be a fair way to go about this."
that doesn't sound like a control freak to me....
but it all looks good from my house
Adam
Boss, your answer doesn't address the question. The OP is saying that his project is to be done t&m or cost plus. Are you saying that you'd let a contractor work for you t&m and not document any of the costs? Just give you an invoice with one line on it??
>Are you saying that you'd let a contractor work for you t&m and not document any of the costs?
Eek. I had a lot of work done that way, and I went with medium detail, but I'd ask for more if what I saw didn't make sense. I questioned an electrician's bill, and saw a huge charge for wire that didn't make sense for a billing period where they were just hooking up fixtures. Asked about it and he "remembered" that he needed 8' of some wire or another, and had to buy a 250' roll. I asked for a refund on the diff, or the remainder of the roll (I know he shouldn't need to store my leftovers). But he had already used it on another job and "forgot" that when doing my billing, and refunded $80. It adds up, and if y'all do t&m y'all have to agree on what level of documentation will satisfy everyone. Definitely determine that ahead of time, rather than later when you're concerned about being overcharged and he's defensive over accusations he's over-billing.
"The OP is saying that his project is to be done t&m or cost plus."
He didn't actually SAY that, although maybe it was implied.
If a contractor is dishonest, he's gonna find a way to skim money anyway. Having invoices won't guarantee anything.
I've had people come to me before asking for invoices 10% over the cost of trusses. (One was a minister) I've never been willing to do that, but I'm sure others would.You cannot unsay a cruel word
This is a cost plus contract. The risks are with the homeowner! The contractor is sure to make his profit no matter what..
In a fixed price bid of course the books aren't open,. in a cost plus they need to be open in order for the contractor to get paid..
The scary part of this is if the contractor should"milk" the job.. slow things down to stay busy.
heck of a temptation.. if your next job doesn't start for a week or so, spend a little extra time cleaning things or fussing with things and it's pretty easy to add an extra week. (or more)
I understand it sorta, I mean there is no unemployment for contractors and I'm certain a good contractor will more than justify the added time...
"This is a cost plus contract. The risks are with the homeowner! The contractor is sure to make his profit no matter what.. "
Not true. It doesn't work that way. Suppose the contractor is honest and is charging 15% over his costs. He's not making very much. Suppose something happens on the job and the contractor has to fix it on his nickel, out of his 15%. Clients will pay T&M for the work but not for re-work or repairs. The contractor is sure to lose his shirt.
Experts in the industry encourage contractors to NOT work T&M because it's hard to make enough (if they're honest). Depending on who you read, the preferred method is to go lump-sum and use a markup of 40% or 50% or more. Don't open your books. Sure, it's hard to do when you're competing in an industry full of unlicensed and uninsured guys using illegal labor, but some contractors manage to get their head and shoulders above all that and start charging real money.... and it ain't 15%.
Out of all the folks posting on this thread it's hard to tell who's a contractor... who's actually done fixed price work... who's actually done T&M work... who's hired a contractor or subbed work out on either of those terms. Seems to be a lot of conjecture going on.
As a contractor cost plus is a winner.. If additional work should occur I not only have my crew working longer I make additional profit..
the math is too simple.
New work costs $10,000.
my added profit is $1500.00 new work costs $100,000 my added profit is $15,000.00
I don't need to eat anything in a cost plus contract..
none of that assumes that my labor is added to the work.. If I do do the added labor, my wages are added to the bill...
Often done around here especially on the high end homes. a fixed price contract adds the cost of change orders back into the fixed price. since there is added paperwork and documentation required there is normally charged a certain dollar amount just to cover those costs.. (say $150 per.)..
(it may be $15.00 if a simple invoice method is used)
Whatever.. I was at one home last week where the builder was finishing moving the second floor bedroom window for the third time.. The woman homeowner didn't like it's appearance from either the inside or outside so she had it moved.. (after the house was down to the punch list) not once but twice!
The contractor was smiling all of the way.. he's on a cost plus deal and is currantly looking for his next client so the added work is a blessing.. She's also grumbling about the kitchen and The homeowner wants to add an outside BBQ.
I asked what would he do if he already had another house to build.. he smiled and said, "I've run more than one construction site in the past"..
I'm guessing, but since this house is 5.5 million and it took 26 months to this point the contractor is happy with his $825,000 (if he accepted 15%)
Frenchy, remodeling overhead is typically double to triple that of a builder.In addition, builders often work for a net profit of 5% more or less, while remodelers typically need in the range of 15% or more, some up to 20% "net."
It depends upon the strength and value of their "brand." As an example, one of my sons will do about $3M is remodeling sales this year. His salary is 10% of that and anticipated "net" based upon the last 2-3 years, will be about 16%.
On the other hand, doing only small repairs and small remodels my "net" generally runs between 40% and 60%.
The determining factor of "earned net" is the amount of potential liability involved in one's niche. Assume more potential liability and it's only natural (and fair) to balance the scale, to obtain more net profit. That's why a diamond cutter goes a hell of a lot more when cutting a large and flawless diamond as opposed to small cheap diamond. The same thing applies if I;'m do do a roof repair on a 4/12 pitch vs. a 12/12 pitch, or installing $60K in kitchen cabinets vs. about $20k in the same kitchen - liability potential: personal injury, damage to products or contents, legal liabilities, etc.
I agree, with the added caviot of customer base..
Contractors in small towns will often charge less due to the "whisper factor" That's where some nosy bankteller or tax preparer whispers your net worth or how much profit you earned at the beauty salon etc. and somehow it becomes general knowledge.
Whatever a person earns it will seem too large to some.. Thus rumors will spread about how you over charge.. In my youth I sold at the local Chevy dealer.. young and aggressive I got a lot of sales. while my average commision was pretty small my paycheck total was really great.. It was less than three months before everybody with something expensive to sell knew my number.. It seemed like I got phone calls once an hour untill 10:00 from realitors looking to connect me with whatever property they had to sell.
I quickly figured it was the bank and switched banks, to no avail! Just a differant batch of realitors/stock brokers..
Meanwhile my sales to the locals decreased by a significant amount due to the idea that I was "getting rich" selling chevy's!
Now I live in a suburb near a large city, I'd hate to live in smallville USA.
I wasn't really interested in this one, but it popped up to the top of the "read me first" lottery. After reading the opening post, I just knew there would be some really "strange" replies.
Boss, did you read the part about the billings being based on cost + 15% ? As the costs are flowing straight through to the invoices, don't you think it just might be fair to be able to confirm the accuracy of those costs ?.
Phill Giles
The Unionville Woodwright
Unionville, Ontario
Runner1:
Whether building contractor or some other type of vendor, you should explicitly know what you are getting at that kind of spending level. There are two ways of determining this-- one is to ask the vendor for his costs, the other is to do your own homework through competitive bids and other means.
It is probably unreasonable to ask the contractor for his costs on every subcontractor and every stick of lumber. After all, he may be trading his own favors with other contractors, or getting deals on materials that help his profit. He sees his business as much more than just your project, so it is natural for him to fit the costs of your project into a bigger picture. On the other hand, there is no reason that you should feel badly about asking pointed questions if you believe specific areas of his estimates are way off.
You should absolutely do your own homework by seeking other estimates and by educating yourself about similar projects so that your have your own base of knowledge from which to work. In pretty short order you should be able to see for yourself if your contractor of choice is pricing appropriately. Ask other vendors for "budgetary quotes" if you don't want to waste too much of their time. Should you find an area where your chosen vendor is overpriced, then put it on the table and let him defend his pricing or make a correction. Never let such things fester under the surface-- your contracter would much rather have the chance to respond then to be blindsided down the line.
Another quick example-- I recently put out an RFQ (request for quotation) to six lumberyards in my area for materials for a residential deck. It was just a two page spreadsheet faxed to their attention. I thought I knew where I would end up, but to my surprise one yard came in with prices $2K below most of the others on a total around 10K-12K. I gave the others an opportunity to do better, but they could not. Then I visited the low bidding yard to make sure they were not offering up garbage wood. To my shock, they had better quality materials than the others I had visited. Now I have a new lumberyard! You don't know unless you ask...
J Painter
Just to let you know where I am coming from, I also am a homeowner. I also own a business, just not one that has anything to do with construction.
From your first post it sounds like you respect your contractors honesty and integrity, and his work, and that the real question is "is it unreasonable for his costs (subcontractor and material) to be an open book?" if this is the actual question, and assuming you do trust him. My answer would be:
only up to a point. That point is sometimes hard to figure out.
I would recommend sitting down with him and have a simple conversation, if he just feels uncomfortable with you poking in his business, ok, maybe he would be alright with providing a more detailed invoice.
Adam
There is not a single remodeler that can exist with a 15% markup. A 15% “markup” nets him about a 13% “margin.” That’s “margin” as in “gross profit” or overhead and net profit. Lets assume he's goal is less that the normal `10% net profit, but 5% instead. Of that 13%, he’s left with 8% to cover his total overhead expense. Since the minimum of overhead expense even for a 1-3 man operation is about 20%, as you can see, the numbers just don’t add up.
That means he’s manipulating the cost numbers. And that's not unusual because of one reason: The public has no clue as to the cost of doing business, a remodeling business or otherwise.
Here’s an example of “markup” verses “margin”: To obtain a “margin” (overhead and net profit) of 33.33%, one must use a “markup” of 50%. Of that 33.33%, about 10% should be for net profit and the balance for overhead. That's the reality of remodeling. Say costs are $100. If your overhead and net profit are 33% OF SALES, you DO NOT use that 33% as your multiplier to obtain your sales price. If you do so, you’d end up with $133.00 ($100 cost x 1.33). If you then multiply that $133 x your 33% to obtain your overhead and net profit, you come up with about $44.00. Deduct that $44 from your sales price of $133 and you have $89 left. Since we know your cost is $100, you just lost $11.00 or 11% on that project.
That's why you must use a “markup” percent of 50% ($100 x 1.5) equals $150. Now take one third of that $150 ($50) for your overhead and net profit - remember it’s 33% of sales, and you’re left with $100 - your original cost.
Now imagine any contractor telling is potential customer that he uses a “markup” of 50% of his labor costs including burden, subs, and materials, and you’ll hear that potential customer in Alaska yelling ”THAT’S A RIP OFF!!!!!”
Understand now why he’s manipulating the costs? He has to bury some of his overhead in what he shows as labor, material or subs costs.
Remember, you’re not buying a “good”: like a car, TV or shirt where it’s already made, and it’s inherent quality is already built in with his “brand name”. Al that remains is to negotiate a price.
Not so when buying a remodel or addition. What you are actually buying is a “promise” - a promise to deliver what is expected.
So, never, ever, buy a remodeling project or repair project based upon price. This is not a “retail” purchase. Buy that remodel or repair based strictly upon reputation and some basic research as to the caliber of the character of whom you will be placing your trust and money. That goes for a $200 repair or a $650K addition.
Also, it depends upon your geographical location as to the validity of the labor rates that "davidmeiland" qouted in his post. Here in Naples, FL they would be doubled.
By the way, you do not “highly value the level of trust you have in him.” If you did, you would have signed his contract by now.
Also remember that most of the horror stories we’ve all heard or read about were caused by those owners who made a conscious decision to buy “price” as opposed to any other standard. Of contractors whose annual sales are $500K to $2M have an average NET PROFIT of 4.2%. 4.2% of $650,000 is about $27,000. Keep that percent in one side of your brain while remembering the #1 cause of horror stories in the other side.
Last time I look, I still could not by steak for the price of hamburger.
If you want to see a copy of a comprehensive contract to determine all of the things that should be included, email me for a copy.
Wow, you can get $110 for a carpenter down there? Awesome.
runner... sounds like a nice job..
T&M... hmm........ 15% doesn't REALLY mean anything ..
a definition of terms has to be included in your description if you want any meaningful feedback..
i prefer Fixed Price Contracts... but i can work for T&M if i have to..
if i were.. it would be on the basis of what dave meiland outlined in response # 2 to you..
i would tell you what my billing rate is going to be for labor... i would explain that it is going to be based on the number of hours that i will be paying my men for the hours that are charged to the job... a normal day from 7 to 3:30 with a half hour for lunch and a coffee break in the morning..... my labor rate that will be charged to you is going to include what i pay the men, the taxes associated with that pay, the insurance ( WC & GL).. plus some overhead and profit... in my part of the country , that means i'm going to charge you $45/ hour for every carpenter on my payroll.. we don't have laborers... only carpenters.. and everyone is going to be charged the same... including me and any time i spend on the job... office or field..some of this labor rate includes some of our overhead and some of our profit..
in addition i'm going to charge you the cost of all materials, subs, equipment, and permits associated with the job... wether it's plywood, porta-potties, temporary electric... anything.... anything in this category ( ie: anything other than my employee's time )... will be charged at COST + 25%.... 15% for overhead & 10% for profit....
if there are changes or selections need to be made.. i'm going to charge you for any time associated with those changes..
everytime i need money ( aproximately every two weeks ) certainly no more than once a month...i'm going to give you an itemized bill showing all of the labor with initials of the workers, and an invoice number for every charge associated with materials, subs, equipment or permits...
if you want to see any original documents , you can request them , i will show you the original, and make a copy of any that you want... i will bill you for that time to do this..
you should have full confidence in your GC if you are going to do COST PLUS ( T&M).. and he should oblige with some type of system that will demonstrate that confidence is well placed..
i agree with some of the others that 15% is generally not enough to survive in this business... unless he is making 15% over and above EVERY COST and OVERHEAD cost associted with the job.... but that can be somewhat covered in the labor rate... which you did not specify....
Mike Smith Rhode Island : Design / Build / Repair / Restore
Edited 4/20/2004 5:00 pm ET by Mike Smith
Mike,
I'm following you on this one..........I was thinking along your lines. When you start charging the guy to tie your shoelaces!! how can you go wrong??
I can't imagine a relationship such as this working. I would NEVER, EVER pay a contractor this way unless I was loaded and had some whacko design that no one would touch and I simply HAD to have it.
I think if I ran my piddly business this way I would be grinnin through the guilt.
And how would the HO know that he is not seeing invoices for OTHER work that the GC is doing??
Eric
Also remember that most of the horror stories we’ve all heard or read about were caused by those owners who made a conscious decision to buy “price” as opposed to any other standard. Of contractors whose annual sales are $500K to $2M have an average NET PROFIT of 4.2%. 4.2% of $650,000 is about $27,000. Keep that percent in one side of your brain while remembering the #1 cause of horror stories in the other side.
Sonny, I sort of understand what you are saying but I am not clear. Do you mean to say that of ALL the contractors in the US whose annual sales are 500k to 2mil, ALL of them combined have an average net profit of 4.2%?
I may be ignorant, but I am curious for sure as to what good this statistic does for anyone. Wouldn't it be better off if I knew what % of those contractors were averaging what % in net profit?. Although the range is broad as well, I think it is a good one because it represents a bread and butter of the remodeling industry IMO.
Eric
Eric, from "Benchmark: Reality Check" by Sal Alfano arcicle in Remodeling Magazine 9/1/2002.
Sales <$500K ------------- Overhead 24.8% ------ Net Profit 1.2%
Sales $500K - $1M -------- Overhead 27.8% ------ Net Profit 4.3%
Sales $1M - $2M ---------- Overhead 29.9% ------ Net Profit 4.1%
Sales $2M - $5M ---------- Overhead 30% -------- Net Profit 5.0%
I keep a copy in my DayTimer for those clients who think that remodelers are taking 5 gallon buckets of money to the bank each week. There's a reason why we have an 85% plus failure rate - tradesmen turned contractors don't know their own numbers, (operating expenses), or how to price jobs properly in order to recapture those overhead expenses that they don't know how to calculate - or exist - until it's too late.
Email me with your fax number and I'll fax you the one page article.
42510.26 in reply to 42510.18
"Eric, from "Benchmark: Reality Check" by Sal Alfano arcicle in Remodeling Magazine 9/1/2002.
Sales <$500K ------------- Overhead 24.8% ------ Net Profit 1.2% Sales $500K - $1M -------- Overhead 27.8% ------ Net Profit 4.3% Sales $1M - $2M ---------- Overhead 29.9% ------ Net Profit 4.1% Sales $2M - $5M ---------- Overhead 30% -------- Net Profit 5.0%
I keep a copy in my DayTimer for those clients who think that remodelers are taking 5 gallon buckets of money to the bank each week. There's a reason why we have an 85% plus failure rate - tradesmen turned contractors don't know their own numbers, (operating expenses), or how to price jobs properly in order to recapture those overhead expenses that they don't know how to calculate - or exist - until it's too late.
Email me with your fax number and I'll fax you the one page article. "
I haven't been on the forum or JLC for some time but it is nice to see Sonny still preaching about product costing.
I am right in the middle of planning to build a new home and I was talking to a builder and he was explaining to me that he works at cost plus 20%. After I asked a few questions to verify what he ment by "cost" and then asked about his crews labor rates etc... I am surprised he is still in business. He is definitely on the left side of the profit bell curve.
If you can afford to spend 650,000,000$ you shouldnt Quibble over %'s and mark up.
Mr T
Happiness is a cold wet nose
Life is is never to busy to stop and pet the Doggies!!
I thought too.... ounds like the contractor is in for the long haul and anything said here is "preaching to the choir"Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming.... WOW!!! What a Ride!
And it's an expasion....Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming.... WOW!!! What a Ride!
I dunno, man. Contractor determines what kind of contract to go with. I think if he wants to pursue T+M, then he's volunteered to have his receipts be an open book. You or I might think it's silly, but it was his call. I think if he wants to go that route, then the 2nd post is spot on. Keep a record, and make it available."If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain
HO wants full open book and it's not clearly stated a T&M contract but the final price is known. HO said 650M and that's million or thousand on top of what's there. Still think the HO is looking to be a micro-manager... and that wil be the tip of the iceburg...Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming.... WOW!!! What a Ride!
when i first read 650m i kinda wonder if this isnt just a lonely person that wants to get email?I know if i have 650 million to spend i aint gettin advice off the internet
Million or thousand.... That was the first flag....
Not willing to pay for advice is the second flag.... Even with that bank roll...Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming.... WOW!!! What a Ride!
You guys are acting pretty lame on this one.
First of all, the use of an "M" indicates thousands in Roman numerals. While its more typical to see 650K, the use of M was not in err.
Furthermore, why do you guys berate the person posting for coming here asking for free advice? I am pretty sure none of you guys pay each other for tips, tricks and insights.
Finally, I don't know what a typical profit marging is in your industry, but a take of $100,000 on $650,000 doesn't seem to bad, especially if the contractor is just acting as a manager and subbing everything out.
Anyhow, the initial post seemed like a valid question to me.
still 650 K i would live in a 60k dump and retire
Pino,
No humans or animals were harmed in this thread.
I think you missed the point. It's safe to say no one really thought it was mil. If so then the HO is talking about building a new Fenway park. The initial post was a valid question and if you read all the posts you will see some expert advice. Where else would you get a math lesson like the one from Sonny. Not to mention the offer of a sample contract. I 'd say the HO got a good education to go with some personal critique. And no one even mentioned the fact that a quality job will usually return a good percentage of the cost upon resale. See Remodeling, cost vs. value report.
-CSC
Pino, when you said: "Anyhow, the initial post seemed like a valid question to me. "
I agree, but the owner did need a little part of Construction Finances 101.
The owner stated: “We have found a contractor who's work we love.”
So how does one put a price on “love.” Most of us have a preference as to the brand of truck we “love”. Most of us have a preference on TVs - Sony or whatever. Most people have a favorite restaurant - regardless of price, and the list goes on.
When I found a lawyer and a CPA I loved, the last question I asked (never asked it) was what their hourly rate was. I could care less. I loved and still “love” the service I receive from both.
When buying services, I buy “services” and not goods. S many of you guys know, since I sold my remodeling business to my sons about 5 years ago, I now only so small remodels under about $8K or repair jobs, some as cheap as $100. My minimum labor rate is $82/hr and often I charge up to $180/hr - for what many consider to be “handyman” work. Yet I can’t handle all of the work I get, and for most of these projects, the customer says: “Just take care of it and Invoice me.” - no estimating or Proposals, for which I charge.
Apparently, when my customers hire me they too feel they’re buying “services” - no, make that “professional” services, and that my pricing structure, regardless of what it is, still represents an excellent value to them.
So I go back to what this owner stated about loving this contractor’s work. That is all that matters - his “work”, and I assume how he “processes” his work: communications, organization, workmanship demands of his subs, documentation, etc. So my point to this owner is this: Why in the world would s/he even take a chance on ending up being just one more horror story for what? - to possibly save $30K - $50K on a $650K remodel? That’s insane.
Again, the vast majority of consumers don’t realize that they are not comparing a Model # XYZ GE refrigerator’s price from one retailer to another. They’re buying a good friend; that’s how important this contractor hiring decision is. So how does one determine the attributes of a “good” friend? By price or by character? They are also buying a stock. They should do their research and then make a decision on it’s past performance and potential future performance and then decide to by or not “based upon it’s current price.” This owner has this “stock’s” current price - $650K. Assuming s/he’s done the research, s/he should now make a decision based upon that research and what s/he considers to be the contractor’s future potential - as their servant, and for a specific duration, and his “return” to them.
But I suspect they have already thought about that. Chiseling on the price is like grinding down a set of brake pads yet hoping the brakes will hold afterward while driving up and down Pike’s Peak. Again, that’s insane. Then again, no one ever said we’re all sane.
I say, hire a professional, and pay a professional a professional’s price - period.
Finally, one more thing. Most of us know that the cheapest people in town are insurance adjusters. Yet even they pay 10% & 10%. And for a contractor to make any profit on the 10 + 10, he has to include line items such as: Tool usage, Supervision, Liability Ins., W/C Ins., Truck expense, Administration Expense, etc., all of which is marked up that 10 + 10. 15% as a “markup” doesn’t cut it! When I use to do large insurance renovations I called it”creating accounting.” And I never even worked for Enron or Anderson Consulting. It’s called playing the game, the game being caused by one or both - greed or ignorance by the customer.
Of course this owner does have another option. That is to hire a contractor whose price is about $70K - $80K less but with ambiguity in his contract. Then during the remodeling project the Change Orders start, and by the project’s end this owner will have been hit with close to $100K in Change orders. We all know that’s another typical “game” played by many GCs to get the job.
Bottom line is that all of these games are played for the single purpose of consumers who are not happy with paying a fair price when hiring a “professional”. Instead, they want a “deal”, so a “deal” they get - they think!
Horror story #176,482 in the making.
Sonny ...
do you remember an article in Remodeling about a contractor that worked primarily with open books?
I remember reading it somewhere ... can't remember where.
Probably within the last year ...
now I'm wondering if it was in FSB ... fortune small business ... I get thru AmEx.
BTW ... that's a great biz mag .. really good stuff in there ...
even if the open book article wasn't one of them?
Might have even been JLC ... I'm pretty sure it wasn't FHb.
Interresting read.
JeffBuck Construction Pittsburgh,PA
Artistry in Carpentry
Maybe I am reading too much into this, but it seems the HO is willing to pay the contractors price and has a great deal of faith in him. I don't see why it is out of line to ask for documentation of costs along the way, especially if it is a cost plus contract, as it appears to be.
I am not suggested the HO use this to chisel down the contractor, but it is just good business to ask for documentation and records to keep everyone honest.
For the record, I sell professional services as well and always provide detailed documentation to the client when requested up front.
Well, i am going to stay out of this onme since I am not in your business. Just seems like a few folks here were needlessly jumping to conclusions that the HO was looking to cut costs by requiring docs.
> Just seems like a few folks here were needlessly jumping to conclusions that the HO was looking to cut costs by requiring docs.
It's becoming commonplace here to not give anyone the benefit of the doubt. Assume they have nefarious purposes and then don't back down no matter what. Better to be right than do right. I read it as innocent, even naive, as you.
"It's becoming commonplace here to not give anyone the benefit of the doubt. Assume they have nefarious purposes and then don't back down no matter what."
You only have to put a couple of people on ignore to cut out 90% of the BS.
My only concern is this. In my 30 odd years as a remodeler and having built a few houses, I've found that generally the only reason for owners to ask for breakdowns is to chisel price. If they had any other reason they would have to know a lot about the typical expenses, percentages of sales, and management problems, expertise needed, etc. of a contractor.
What good does it do for me to ask my doctor or dentist, or CPA or mechanic for that matter, for a break down for what they are about to do for me. What the hell do I know about the advertising business, a doctor's business or a mechanic's business? Nothing. So what they are paying for "parts" means nothing to me. In our industry, the owner generally wants the contractor to charge him/her the same price the contractor pays, yet will not allow him to make a decent net profit.
Contractors go broke because they "buy" the owner's price instead of "selling" their price. The last time I gave a price to a customer and he said: "Gee. That seems kind of high." I shocked him. I said: "OK, give me your list of materials, labor hours, rates, sub contractor prices, and we'll compare them to mine."
"Well! I don't have those prices, but your's JUST SEEMS HIGH."
Well, what the hell does that mean? And now you have an idea of exactly what I think of him for saying some stupid things like that , yet people say things like that to contractors every day, as though they are suddenly professional construction consultants.
"Sonny, it will cost you $2843 to rebuild your truck engine." I simply cannot envision me replying to my mechanic: "Gee. That seems kind of high." What the hell do I know about rebuilding an engine, or a mechanic's operating costs?
I also shock customers when I give them my GeoCel Corp. sealant manual. It's abut 230 pages long and details everything about different sealants and their proper applications. So much for the saying: "Ahhh. Just caulk it."
"Ahhh. All you have to do is slap up some drywall. How much can that cost, anyway?”
Get my point?
Edited 4/21/2004 12:17 am ET by Sonny Lykos
Got your point, but... "Sonny, it will cost you $2843 to rebuild your truck engine." "Well Billy, that's more than I had expected. Is there anything we can do to lower the cost?" "Sure Sonny, we can re-use the altenator and air conditioner off the old engine, leave out the competition cam, don't chrome plate the headers, and no fuzzy dice on the mirror. That'll drop the price by $500."
Same idea with the house in question. The HO and GC need to agree on what's included in the bid, what level of finishes, brands of fixtures, etc. If tyhe GC is bidding exactly what the Ho asked for, then the ball's in the HO court to accept or ask for suggested cost savings.
Based on the HO's last post, it might not be a cost plus job. He saw an item at the bottom of the page "markup" and assumed something. Might be a bad assumption.
Whenever you are asked if you can do a job, tell'em "Certainly, I can!" Then get busy and find out how to do it. T. Roosevelt
I agree with your first paragraph. Unfortunately, most objections are: "It seem kind of high."
Granted, that comment is merely semantics whereas what they often really mean is: "It's more than we expected." Furtunately, nearly all of my own customers are professionals, so they should at least have a better grasp of our language. therefore when they say it seem shigh, I accept their comments at face value - not knowing what they're talking about.
Besides, before I give a price, we discuss many, many ways of keeping the price down, so they have many opportunities to discuss various aspects of what makes a final price go up or down, optons, priorities, etc.. Unfortunately, far to many people want the Mercedes and all of it's appertenances, but in the back of their head is the price of a Buick. It simply ain't gonna happen.
And therin lies our problem as contractors: Our "products", or rather "prototypes" which is really what they are, are not presented in any showroom as complete projects, such as appliances, cars, etc.
On the other hand, I'd like to have a $10 bill for every time I got a job, or son Tom got a job, that started out at $250,000 and thru additions (changes) , ended up being $400,000, or a $30K project ended up being a $45K project, or in one case, a $680K project ended up being a $1.3M project, and the owners were thrilled and wrote checks like next year the world would end.
Thattells me that once the process has started and a relationship of trust has been established, for many people, prices are no longer questioned any more,. adn that should be the #1 priority of any good business person, contractor or not, to become a "trusted advisor" to his/her client. For these trusted advisors, the client's best interest comes before the business owner's.
Anyway, we’re in a terrific industry. Where else could a plain man such as myself be trusted with the responsibility to make the best use of large sums of my customer’s money for them, become friends, feel pride in my projects, ability to manage many other companies that assemble many other company’s products in the project’s completion, yet sleep each night satisfied in knowing I’ve done right by people that day? I feel fortunate to have been given such talents. As such I judiciously scrutinize those of whom I render my services because not always do personalities come together as a good “fit”.
Unfortunately, far to many people want the Mercedes and all of it's appertenances, but in the back of their head is the price of a Buick. Other than complaints of poor work, that's probably the most common reason customers post questions here.Whenever you are asked if you can do a job, tell'em "Certainly, I can!" Then get busy and find out how to do it. T. Roosevelt
How many times do you take your vehicle in and agree that the price will be cost plus? And even if you did, all the garages I've ever been to will itemize materials and labor.
I don't begrudge anyone a fair markup on materials (whatever that is) but I do want a breakdown, and feel it is fair to get one if I'm paying for cost plus or T&M.
If a guy tells me it will be $2350 to make my car run, and I accept that, then I don't care what he spent on parts or labor. If he tells me it will be T&M/cost plus, then I do care. How else can you be assured that he did the work he said he would do, and that reasonable prices, including markups for parts & OH, were used?
I went to get a new pump for my boiler one day. Went to the local HVAC company, and bought one for $300. I had no idea what they cost, and I just needed to get it in. On the way home, stopped at a plumbing supply, and bought the EXACT same assy for $109. To me, that first guy was a major ripoff. Had it been $125 or $150, no big deal, profit is not a dirty word (the plumbing house was making a profit at $109, so $125 would have been at least 25% or so MU.) But to TRIPLE the price? Needless to say, he doesn't get my business, but plenty of referrals from me, mostly to stay away.
I feel that anybody who wants to hide their numbers on a cost plus or T&M job either doesn't KNOW what the numbers are (or what they should be) or are hiding something.
There are two types of jobs (obviously not talking about where the HO keeps changing things): those where pretty much everything you need to know is available, and those where you just cannot imagine what is behind those walls/ceiling/floor/whatever.
On my contracts I list all the knowns, and I also specify what is unknown. This pretty much covers all the major surprises. Yes, there will be a few that sneak in, but, if one does his homework diligently, it is amazing how much you can actually find out. And the more details you know, the more accurately you should be able to price something. This will also give you an edge against the slimy lowballers. And if the unknowns are spelled out, then the HO cannot assume that you "should've known that, you're the pro."
BTW, Docs don't charge T&M. There is a standard cost for every procedure they do.
Lawyers DO charge by the hour most of the time, but they are more than happy to give you an estimate on most jobs, and this discloses their hourly rater, and the $20 they charge to send a fax. You might not likj the price, but you know what they're charging for.Pete Duffy, Handyman
I see some contradiction in your post.
First you say if the mechanic wants to chare $2350 (fixed price) then you don't care what his profit margin is. All that matters is the price that you got on the goods and services.
In the next paragraph you state that you feel a supplier ripped you off when you got a fixed price on a boiler. I fail to see the difference between the two examples.
Caveat Emptor.
Jon Blakemore
“We have found a contractor who's work we love.”
So how does one put a price on “love.”
From what I HEAR, Love costs about 100$/hour.
Sex is a little cheaper.
And true love can cost as much as 1/2 of everything you have.
But getting screwed is usually a bargain!! Mr T
Happiness is a cold wet nose
Life is is never to busy to stop and pet the Doggies!!
I'm late to this discussion Sonny.
Your point that the HO is buying more than a service but also buying a friend?
I go even further than that. On job this size, the contractor is practically marrying into the family. I use the allegory of dating to find a mate. Trust is the primary concern - that and quality of production.
Quibbling about a few thousand bucks either way is detrimental to that trust. That goes for the contractor and the HO, I think. I've done several jobs in the 250K to 500K arena at cost plus (seems some here in this thread think cost plus and T&M are the same but they are not)
My books are always open to anyone who wants to see or check in my office. I only had one time that anyone wanted to verify a cost and it never actually got that far. The estimate was for 87K and the final tally was about 12K over that. when I pointed out that they had added a better grade of siding and flooring, the issue suddenly disolved and the check got written. Tracking and documenting the changes is worth the time.
Of my better customers, one did not display "contractor loyalty". They went to the one who was most available at the time they were ready to do the work. Last sequence, they got took. Called me to fix and finbish work that was left half assed. I asked why...he said he didn't want to talk about it. Just had another job come up with them. Told him it was a difficult job and might cost double what he had in mind....He said, " I have absolute trust in you that it will be done right the first time. What ever it costs is what it costs, so just get it done"
That is the klind of comment you hear when you build a business on quality and trust instead of price. It feels good.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin, I concur whole heartedly. Your comment is one more reason why in the past I've suggested my peers read, among other books: The Trusted Advisor.
I think my attitude correlates yours: One of our main priorities, and to get our potential customer to understand, is our total commitment to make the best use of their money that is entrusted to us.
I often come fight out and say to them: "My 1st responsibility to you is to provide you with the maximum use of your money during your project. As such I actually act as your agent when dealing with myself as well as our vendors and subcontractors, yet without sacrificing quality control and all of the other aspects indicative of a remodeling project. I do not know of any possible way of appointing a dollar amount to that tremendous responsibility."
It gives me great satisfaction to sell under the umbrella of the knowledge that I present myself as nothing less than a professional in my industry, offer my services as such while expecting to be treated in the same manner and nothing less. I have no doubt that you and many of our peers here feel exactly the same.
After reading your second post, I see we also share the same sales philosophy, that of offering options, (what good sales people do), their pros and cons and let them decide. After all, it's their money.
Edited 4/22/2004 11:14 pm ET by Sonny Lykos
At our Rotary Club meetings, we all talked in "k" for thousand; the two bankers always used "m" for thousand. m is short for mille, ie, thousand. k would be metric; I didn't think Americans were into metric?
I have a little problerm with a phrase late in your original post, when you said something about "demand" to see the numbers...that's a little harsh. But, to answer your question...sit down with the contractor, get a complete list of what charges will be included and how the subcontractor costs will be rolled in, so there's no surprises later when he includes some odd charge and you weren;t ready for it. And ask him how he proposes to back up, or verify, the costs that he submits each invoice. He may intend to include copies of the sub and supplier invoices. If not, then tell him up front that you would like to see them with each bill. If it's a cost plus contract, then you should expect to see the cost basis.
Whenever you are asked if you can do a job, tell'em "Certainly, I can!" Then get busy and find out how to do it. T. Roosevelt
WOW! I posted this at work (don't tell), and I had no idea what a response this would elicit! First of all, let me say that this discussion board is a HUGE resource. I literally had to just print out the discussion and sit and read.
First things first - this is a real job, in Fairfield Count, CT. And by the way, $650M is a probably only an average project in our neck of the woods. Still, it is huge for us.
We have reviewed three proposals and made a verbal commitment to our contractor this past weekend. This has been a year in design and planning - with a lot more careful planning to do before we put a shovel in the ground. We are working through clarifying final specs and contract language together (advice?).
I guess the first point of clarification is our contractor's proposal: the line-item proposal had a bottom line for markup, so I assumed cost plus. What I realize from this discussion is that he wants time and materials, and we want a fixed price (with very detailed specs around exactly what that price includes in detailing and materials of course). Who knows what he will think on this point.
I have to admit to you all, that I am anxious about taking the plunge. We have financing lined up, and our city approvals (huge task). My greatest fear is losing control of our budget. If this thing came in at $800M (or K or whatever), it would do us in. And we have already shown a willingness to think outside the box (deferring our fireplace, leaving a guest room and master suite roughed-in, doing away with some level of trim detail on the second floor, deferring a covered porch and pergola). I believe in our approach though. We talked about phasing (couldn't deal with 2 permits, 2 excavations), but decided to get the exterior completed to the final stage, and work on some interior spaces later.
I want to close by thanking you all for the very entertaining and mostly informative read. On a positive note, my wife and I are very excited. It is a beautiful design (carriage house, shingle-style) on a pond in the woods, dark green trim and taupe siding. When we get going, I am sure I will be posting pictures to the board!
Kindest Regards,
Runner1
This can be an exciting and very fulfilling experience for you. The key, and it's an important key, is for you and your contractor to feel comfortable with each other. And to the extent that you both feel free to be up front (tactfully) with each other.
One of the biggest problems contractors have with customers is delays after delay in product selection. The other problem is that while many contractors, like architects, can envision what it will look like, and room by room, most lay people cannot. That's the reason for some of the Change Orders.
Contractor hate Change Orders because most owners don't realize the domino effect they have on the schedule. Personally I love Change Orders because each one makes that project more personal for the owner, and after all, that should be the #1 goal of each contractor - to continually and prioritize pleasing every single customer.
By the way, as long as you're from Fairfield county, CT, I assume that you are aware of Mitchells/Richards, the upscale clothing stores - one in Westport and one in Greenwich. Jack Mitchell wrote a book entitled: Hug Your Customers - The Proven Way to Personalize Sales and Achieve Astounding Results”. ISBN: 1-4013-0034-0
Buy a copy, read it and then give it to your selected contractor softly saying - “Hint.” Customer service and building customer relationships happens to be an obsession of mine.
With an upper limit to the budget, I can see that you need the specifics but it is impossible for him to commit to a specific price when you have indicated that you have not yet nailed down the interior details. I appreciate that you are willing to be flexable there.
If I were negotiating with you on this basis, I would also prefer to work on a time and materials or cost plus basis. It would be most valuable to know up front that the top side of the budget was a certain amount. I would strive to do the most for that sum on your behalf. The way I would understand this is that the figure of 650K is your budget and noit the contracor's estimate. Correct me if I am wrong.
I customarily work this way and not on fixed sum agreements because we generally get started before all the design details are ironed out. It is a process. If you turst him and like his work, find a way to work with him. If you don't trust him, he has no business on your property, in your home, or handling your money whether the contract is fixed price or T&M or cost plus
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Well, it has been a busy week, so I have not had a chance to say I am absorbing this discussion like a sponge. Forget novels - I just come home and read the new additions to the discussion chain! A lot of this discussion has morphed into things that aren't relevant to us. But by and large, the feedback is overwhelming and invaluable. I am amazed at the expertise and passion that has come out on this subject.
I first want to assure everyone that our purpose in struggling over $$ is not to "squeeze" our contractor. The guy to whom we have made a commitment is in demand. To simply insist on lower prices would just cause him to go on do someone elses job.
In actuality we are really quibbling over what actually gets built, and just how it gets built. The only way I know how to make this work is to partner with our contractor - to get very involved in how all of this is going together. That means getting a say on just how money is spent, and on what. A prime example is an HVAC discussion that we had this afternoon. The number seemed high for what we were doing. In actuality, the HVAC sub had included a whole new zone that we had not discussed, and had oversized the condensors for the AC. We are going back and revising numbers based upon a more modest system.
In a dream world, what I really want is a contractor who is willing to work hard and think creatively about how to save money, and how to spend it smartly. I think that is different than asking him to give up his profit. Again, its not about price, it is about spending the money we've budgeted for this project in the smartest way possible.
When I read that budgets are regularly exceeded by 30 or 40%, I feel a cold sweat coming on. The 650K is a stretch for us. If we do this right, I find it hard to believe that there would be enough unknowns to overrun a project by 40%.
If you read my last post, you will understand that what we are really doing is building $650K of a long-term dream project. We are willing to give up a lot to make sure that what we have to spend gets put to the best use. Otherwise 12 months from now my wife and I will be really disappointed, and so will our contractor.
The good news is that this discussion board has helped us start to flesh out our contract and job specs to the greatest detail. So far, so good. We have a lot of work to do before groundbreaking. By that time, we have to be on the same page.
Thanks All!
"........and had oversized the condensors for the AC."
From what's happened here in South Florida, oversized condensors is a big mistake. The AC will cerainly cool the air, but will operate to shortly (time) to dehumidify properly. If anything, they should be slightly undersized is what I've been told.
Some minor things to consider. All exterior wood should be backprimed,, including the end cuts - not easy to get carpenters to do so - keeping a gallon of primer open and priming each cut edge, but the best route to go.
Ext. door jambs should be sealed at their bottoms, or if available, use PVC jambs and ext. trim. Brick molding, both Florida and Yankee style (conventional) are also available in PVC.
Stay away from "ungalvanized" ext. metal doors. They rust from the inside out within 5 years. Go with fiberglass doors, but even there be careful since three qualities exist: Finger jointed wood edges, solid wood edges or the best - composite edges including top and bottom.
Stick with one good coat of primer and two finish coats on all exterior painted surfaces. Only use the top of the line regardless of what brand is used.
Just a few items to discuss with your GC.
Piffin,
I particularly want to thank you for your comments - particularly the ones about income level. Its funny. People assume that if you live in a part of the country that is expensive, you must be loaded. I make more money than anyone in my family, but the truth is, my bothers who live in Texas have a lot more disposable income than we do. Its unbelievable how little $650K buys around here - maybe a comfortable Cape with 3 bedrooms, 2 baths and a 1 car garage.
Anyway, thanks.
one thing that no one else has touched on yet is the property values in your area, and what the improvements will add to that value, and comparing that amount to the cost.
in my area (also outrageously high california) sq ft construction costs are approx $100, so your 2000 sq ft house has a contractors price of about $200,000 (selling price over $750,000)
i can build that house for $100,000, not counting myself and my partners labor, and we have no problem doing two a year.
my point is what will your house be worth after improvements, does it "fit" in your neighborhood. by that i mean is it a well thought out design that will appeal to many who would consider a home in your area, not overbuilt from which you will never recover your investment? if said contractor could just buy your house (or the one next door), do the work himself, and resell for a profit greater or equal to what you might pay him why should he work for you?
i think this a more important consideration as to contractor price than owners income level. as a contractor i add value to homes, and with common sense and proper planning i add more than i cost!
Without question we will recover our investment. We are the smallest house in the neighborhood. The very contractor we are hiring did the house next door (the most expensive on the block), and appraisals came back at $1.6MM.
So, the problem is not what we can recover, but what we can afford. Actually, this is part of the problem. Contractors bid based partly on the final appraised value. I want a fair price whether the house is in our town, or in the one down the road, where appraisals are consistently 20% less.
Thanks for the feedback.
now see thats just what i'm talking about, here you have someone whose work you like, and who has made money on paper for the people next door and you are worried about getting the price for the cheaper neighborhood a few blocks away. if you want those prices you should move.
what i hear you saying is that your house will be worth more than it costs for improvements when the work is done. do you get that those people who are providing that labor to increase your net worth are giving you something? do you get that they could just as well borrow the money, do the work, pay the finance charges, and not have to put up with you worrying about getting it at the 20% less price of a few blocks away? it amazes me that people think that the contractors are getting over and it is homeowners like this that need to get a clue
Seems like an overreaction. Or maybe I'm wrong. Should contractor prices be set based on what the job will cost to do, or based on how much can be snagged from the client?
Runner wants, according to him, a fair price regardless of where the work is occurring. Is this such a bad wish?
To all, if you were building the exact same house in two different neighborhoods, would your price be the same or would you charge more in the more upscale neighborhood, all other things being equal?
all other things being equal.. it is the responsibility of the contractor to maximize the profits..
walking a fineline between pricing to what the market will bear and maitaing your customer's interests as your own ( and the ability to sleep at night ) is a constant dilema..
we live in what has turned into a very upscale community... as a result.. our costs are higher.. sometimes new people move in and bring their upstate contractors with them.. their prices are lower..
but others move in from real up-scale communities ( like NYC and Fairfield County, CT ).. they hire Newport Contractors.. their prices are higher than the local contractors.. so.. on the same block you could have a homey.. and upstate contractor , and a Newport Contractor all working away... three completely different pricing levels..
go figure......
i think it still comes back to experience and integrity.. i think we offer both.. and we're worth our price.. ( and we ain't gettin rich , neither )Mike Smith Rhode Island : Design / Build / Repair / Restore
>walking a fine line between pricing to what the market will bear and maintaining your customer's interests as your own (and the ability to sleep at night) is a constant dilemma..
That's really it, isn't it? And the customer's obligation is to optimize the value they get. So just like I don't fault you for maximizing profit (far from it, that's to be celebrated), I also wouldn't fault Runner for exploring reasonable ways of getting the best value he can. Each looks out for their own interests and hopefully they find a common ground and work together.
Still...I haven't yet reached the point where I charge one client more than another...always been in businesses where the price is the price and it's not set based on client's affluence.
jim... i don't charge different rates for different customers.. i charge different rates for different costs..
some people telegraph that they are going to be hard to please.. that is a cost that has to be factored into the bottom line.. some products are easier to work with..
some communities are easier to do business in... Friday i pulled a Building Permit in Middletown.. took at least 10 minutes... 9 of those wa waiting for the Building Inspector to finish with the customer ahead of me.. same thing in my community..
but try that in Cranston... nothing but red tape.. and CYA.. there it would be a week if it went smoothly..
different levels of affluence have different expectations that have to be met to satisfy.. that is a cost.. and it has to be reflected in the price .. or you will not have enough money in the price to satisfy the customer.. so you will not get a referral..
anyways.. raise the price to take advantage ???.. not that i am concios of.. but recognize that you can't work to expectations for the same costs for different people ???.. you bet..
there really are some people out there that no matter how much money you charge.. you will NOT make a dime....Mike Smith Rhode Island : Design / Build / Repair / Restore
Gotcha
i apologize if i over-reacted, its a sore spot for me that the work i do is worth more on paper than i charge for it, but still i am haggled on my price. i guess it all has to do with being expoesed to the socialist propaganda of the labor unions having to do with profit being the byproduct of, and therefore exploitation of labor.
i understand it is within the homeowners rights, and to some degree a responsibility to get the best price for quality work, but more and more i look to work on projects that i own (the bank owns it i make the payments) and sell for whatever the market will bear. it seems the work goes better without a homeowners input, or being underfoot, and if i do work for a homeowner i am making a sacrifice, and doing them a favor. i don't mean to say this in a harsh way, but it is the truth and i wish the homeowners understood this, it may make them less of an annoyance.
so i guess what i am saying is that the job should be charged for "whatever can be snagged from the client" ,your way of saying, "whatever the market will bear"
it just seems to me that if you do a job that adds in a conservative appraisal 750K of increased value, the price should be 750K minus the costs of the construction loan.
>t just seems to me that if you do a job that adds in a conservative appraisal 750K of increased value, the price should be 750K minus the costs of the construction loan.
I doubt that that's a popular position, and I'm glad that my contractors didn't try to guess at appraisal values when setting their costs. They based it on things like material costs, labor costs, and overhead.
I wonder if any other contractors here set their bids based on anticipated appraisal value of the completed work?
And what would you do if the appraised value increase would be less than the cost of the project? Willing to lose money in that case?
"it just seems to me that if you do a job that adds in a conservative appraisal 750K of increased value, the price should be 750K minus the costs of the construction loan."
But if it only 300k in value would you be willing to accept that amount as full payment?
That seems "fair".
yes it is absolutely fair, and i will take it, despite the spec house from hell thread, a well thought out, spec remodel or new construction in this area of nor cal will make you more than a competitive bid job will!, to exceed $100 per sq ft costs typical for new construction!
also to address the other posters description of line item costs in nor cal workers comp alone is 19% of the wage if the wage is higher than $23 per hr, and the hard costs of labor burden are 30%, if you do your books yourself. So charging 35% for overhead will get you broke quick, and your contractor is making it up somewhere else like listing an employee's cost at $37 per hr., when that already includes labor burden.
"yes it is absolutely fair, and i will take it, despite the spec house from hell thread, a well thought out, spec remodel or new construction in this area of nor cal will make you more than a competitive bid job will!, to exceed $100 per sq ft costs typical for new construction!"
Yes, but what the remodel is upto the HO.
I have no object if you buy or partner with some to obtain a house for the purpose of remodeling and flipping it. In fact I have a friend that is an RE agent and is like for such property. Not for a major remodel in this case, more of a cleanup/fix up job.
But that is not the case here. It is the HO that is spec'ing the design and if they want something odd ball or might even devalue that house (pools do that in some areas) then that is up to the HO. They are ones taking the risk and getting any reward.
"it just seems to me that if you do a job that adds in a conservative appraisal 750K of increased value, the price should be 750K minus the costs of the construction loan."
That would depend on whether you are a contractor building on spec, or hired to do a remodel. The difference is in who is taking the "risk". If you want to gamble on appraised / resale value, then you build spec homes. Or buy and remodel. If, on the other hand, you are hired to do a remodel, you figure out your normal operating parameters, and go from there.
I agree. This guy is probably in the top 1% of the US income distribution and he's fussing about contractor's fees? We need more class consciousness on BT.
No matter where the OP is coming from, what I see is that the contractor shows a line item for markup of 15% (or whatever). If you, as a contractor, show a markup as a line item, that would imply that you are able/willing to substantiate the base number that the markup is taken from. If not, it should be rolled into the price, not shown as a specific line item.
Personally, I don't care what the markup is on work we have done; we get either a firm price, or an estimate, depending on the nature of the project, and we go from there. How you as a contractor run your business doesn't matter to me. However, if you want to go t&m with a markup, you should be able to substantiate your numbers. In case someone (ie, your client) wants to see them. After all, you are claiming to be marking them up x%; if you are, what's the issue?
Should someone at his supposed income, accept whatever bill is handed to him without question? If he doesn't understand something about building and building contracts and billing for that, should he not ask about it just be/c he has some money? How should he have phrased this to us so that he gets his question answered rather than has his motives questioned?
fwiw, I give him credit for asking about something that confused him. He also needs to ask the contractor about the phrasing of the contract, but there's no harm in asking here, too. If it's not t&m, what's that clause mean? If it is t&m, what are his rights and obligations as the contractee? I think he's just asking for advice that will help him to be a smarter consumer, and that is in everyone's best interests. The smarter he is in the workings of this contract, the better the relationship be/t him and his builder, and that's better for everyone. I give him kudos for asking.
I agree. No one, regardless of income, wants to or should pi** away money. Likewise, they should be aware of the "whys" the money is going here or there.
The problem is concumer ignorance of basic business operating expenses and the concept of markup and margins.
As I mentioned earlier, when consumers find learn the realities of what it costs to run a construction business, and the realities of the concept of markups and margins it scares the hell out of them so they often feel they're being ripped off. And I haven't even delved into the tremendous amount of management expertise needed to "run" a substantial project such as the size of this one. I also wonder how many consumers know that when they take their cars to a dealership for work, they are charged a 400% markup on parts, or a minimum or a 200% markup on jewelry "after" the sales price has been applied.
So from the constractor's perspective it's easier to manipulate the numbers as is done for insurance work, than to teach Construction 101 and 102 to the owner which takes hours and a lot of documentation. That's why I stick with fixed prices.
From virtually every singel law suit I've been involved in as an expert witness, even judges do not consider overhead to be pertinent to the price, since they nearly always deduct those amount from the amount awarded to the contractor where he wins the case. So as far as judges, it costs noting to operate a business. So business ignorance exists in every aspect of the chain of money and in the legal world.
Besides, it must be scary for consumers who want large projects done to have to deal with members of an industry that has an 85% plus failure rate and does not enjoy a pristine national reputation. Let's face it, to many, we're used car salesmen, and it's our own fault.
Of course you are right -- an HO's income level should have no bearing on how he is treated by contractors, his right to a clear accounting etc. And this is really off topic, but I'm struck about how little comment there is on the fact that the most of the people getting all the high-end work we read about on BT and in FHB are actually rich, not just middle class. Most of them live in a consuming universe very different from the guys that work on their houses.
Based on your comments in this post, I have to think that maybe I am blessed with clients who are more intelliugenbt than average. They ask all the smart questions up front and then pay the bil I submitt.
Some contactors get insulted if the client questins items or prices. For me, it is a selling op.
Copper in stead of AL?
Here's why__________
foam insulation?
This is what it will do for you
Plaster vs sheetrock?
..... you make the choice
Ipe~ or PT decking?
This is why....
Allowances?
I'm defining the budget limits for design consideration...
But always best to make those definitions up front. The discussion can be illuminating per the thinking processes of the client.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
>I have to think that maybe I am blessed with clients who are more intelligent than average
You got that from something _I_ said? Hmm. Maybe they have more disposable income than average...
I'm blessed at the moment with clients who are playing the balancing act of determining how much house they can afford in a time when their income is changing from employment to retirement, their for-sale family house will provide them with an uncertain amt of equity, and material costs are rising at an alarming rate. They ask great questions, too, so I wouldn't guess the clients to be less intelligent than average, or even average, but they can't always swing the bill that would result and often need to compromise. I'd offer to trade with ya, but I love 'em all.
No, my implication was that I ALSO have intelligent clients. Yours ask questions. Mine ask questions. When they ask good questions, and ask them up front, as this poster is doing, it indicates a high level of thinking, to me.
Also, Most millionars arre made and not born. They get made that way by using their thinker and working hard. The two go together.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
"This guy is probably in the top 1% of the US income distribution"
I take that as an ignorant or at least uninformed, and probqblky prejudicial statement.
There are a great number of reasons why someone can spend those numbers on an addition to a home they dearly love when their income is only an average of say 70K annual. Imaginew if you will that maybe a dear family member has passed away and left them the money. I could type on.
All too often I see contractors assume that anyone talkng about building in this price range can afford any damn thing they want. That is simply not true. He has clearly stated that there is an upper limit to his budget and that building an addition that costs more would severly hurt him.
That is definitely NOT the woreds of a person in the upper one percent income brackeeet.
It is offensive for a builder to make presumptions on someone elses money.
I might imagine that his income is higher than mine or that it is in the upper ten percent of the general populace, but it would be my own imagination only. Apparantly, you imagination is more active than mine.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I've evidently hit a nerve here. Sorry. To respond to your points:
1. I completely agree that it is unethical soak the rich or to overcharge on the assumption that a client has unlimited sums of money. The original poster clearly has limits on his addition budget and these should be respected.
2. Although I know nothing about the original poster's finances, my guess is that anybody with that kind of renovation budget is pretty well off. By well off, I mean better off than 90% of Americans. True, he may be a roofer's apprentice who has won the lottery or inherited from a rich uncle, but considering his location, that seems less likely than my assumption that he is economically fortunate. MOST people with 70K incomes don't spring for 650K renovations.
3. My main point related to the economic disparity between people buying high-end work (the kind we see in FHB) and the people doing it. I'm a near-neighbor of yours on Vinalhaven. As a summer resident I have TWO houses. Given the rise in midcoast Maine land prices, the island contractors feel lucky to have ONE. I don't think for a minute that my two houses are due entirely to my hard work. Although I've built the Vinalhaven house myself, I'm sure the locals view me as a loafer: two months kayaking, building boats, piddling with the cabin, etc. So, I wouldn't be surprised if they resented my good fortune.
Sorry if I made it sound too personal. But I do get yanked when somebody makes assumptions about another person's income because in too many cases I have seen it be way wrong. I know a painter who prices his work according to the neighborhood. I quit using him.
I notice in your second paragraph that you adjusted him from the top one percent to the top ten percent in income. If I were guessing, that is more likely the zone I would place him.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
read .. then re-read mike smith's post.
he wrote exactly what I was thinking.
me ... fixed price ... t and m .. who cares.
as long as I add it all up right ... and the customer keeps the checks coming.
customers usually think they "save money" by going t and m ...
I see it usually happen the other way around.
U really want charged for ever hour spent and the very last stick of wood?
Every single change from the original plan no matter how simple and basic ... Great!
T and M's more hassle ... more time .. and more paperwork. All the I's and T's gotta be dotted and crossed .... it should cost more so you "know for sure" that you got a "fair deal".
Just ask the contractor ... tell him it's alot of money for U ... remember it's his salery for a while .. so it's probably a lot of money for him too .... and you aren't used to handing that kinda cash over ... but expect to be charged for making things more complicated.
Jeff
Buck Construction Pittsburgh,PA
Artistry in Carpentry
First off, I am not a builder pro so my point of reference comes from a different industry.
quick thoughts. As others have mentioned, it sounds like you are having this job done on a cost-plus or time/materials basis. If this is the case you have every right to demand a detailed accounting of everything your contractor purchases and does. Would you accept a T&M invoice from your attorney with out detailed justification?
I regularly take on projects in my business (advertsing) in a similar manner and provide full disclosure of all outside costs, including copies of all invoices. You can't possibly conduct a business transaction of this type with out full disclosure?
As for those here in the Tavern that might feel such a request displays a lack of trust, remember this is a business transaction first and foremost. Trust is important but so is disclosure and documentation. You should take nothing for granted. Any credible contractor should recognize this and accept it willingly.
One caveat, when I take on cost-plus or T&M projects for my clients, I do make them aware up front that there wil be additional costs incurred for the extra bookkeeping tasks. You can't expect them to take on the extra effort without compensation.
We work on the basis that you describe quite often. We prefer to give a firm price but many of our jobs are on a fast track design course and the plans are not complete enough for a firm price. Thus we use cost plus.
Everyone here is right. 15% is not enough. Your contractor, if he is to stay in business, has his profit in his labor. That is what we do. We give an itemized bill listing all of our costs but we have never had to verify these figures with the invoices from our suppliers. If you do not trust your contractor to give you his actual costs, you do not have the right guy. How would you know if the invoiced material actually went into your house? Sometimes I'm not even sure.
I do not examine my subs bills very carefully. As long as they are consistent with what we had discussed before the job began and with past work, I don't look at the details at all; I just sign the check.
It is possible to control a project by monitoring each and every single expense but be careful because you will be the one doing all the controlling and you may not like what you create. Find a guy you trust, pay him what he asks for, hold up your end of the decision making process and enjoy what you as a team have created. Don't be afraid to print out this entire thread and show it to him when you have a frank discussion about money before the project starts. It will be a good way to clear the air of a lot of uncertainty. Good luck with your project.
Runner1,
I didn’t have time to read all the salient posts above; I’m just going to dive into your question “how do we go about truly verifying his costs?”
The construction documents and specifications should attain a level of detail that would allow a GC to provide you with a price-not-to-exceed—regardless of latent conditions—and clearly layout the procedures for documentation of costs and submission of change-order requests and pricing.
I assume yours do not, or you wouldn’t have asked the question.
$650,000.00 is a lot of money by any standard. My advice is to protect yourself, despite your high level of confidence with your future GC. Your architect should be advising you on these issue s, and if he’s not, he needs a swift kick in the butt. Here’s a quick outline of how most responsible GMP contracts are executed:
1. Send RFQ to at least 3 General Contractors—Put your loyalty and confidence to the side momentarily as you review the bids/GMP. You can award your favorite GC extra $ for trust and comfort, but you owe it to yourself to complete this exercise. Get your architect to review the numbers as well, especially for fee, general conditions, and progress and payment schedule.
2. Have a competent attorney draw up a contract based on the ConDocs and negotiated schedules.
3. The winning bid should submit subcontractor bid proposals for architect’s review and your approval.
4. Architect should make site visits corresponding with Building Dept. inspections.
5. Sleep well knowing you’re on the same page as your GC. It’s misunderstanding and “honest pretense” that ruin most relationships. Keep everything in writing so it’s clear; it’s the fairest way for both parties.
It may seem a little cumbersome, but believe me, it’s worth it. I know the AIA website used to have several publications regarding these issue s. I urge you to take a little time and at least skim them.
Here’s to your success!
rex... if he sends me a RFQ for a $650K job... i'm going to charge him $3K to prepare it....and i'm not going to even do that if i think i may be wasting my time....
Mike Smith Rhode Island : Design / Build / Repair / Restore
and does that $3K include copies of all sub proposals forwarded to the owner and architect...?!
no.... it doesn't.....i'm not selling an estimating service... if they want that , i'd have to get compensated more..
at the end of this process, i will give them a firm FIXED PRICE PROPOSAL and, i'll be prepared to tell them what their alternatives are and help them sort thru their decision treeMike Smith Rhode Island : Design / Build / Repair / Restore
Mike, right on. The estimating costs are customarily subsumed in the fee, though, right? Preparing bids is traditionally the cost of doing business. It’s a tremendous challenge, no doubt about it, but the risks are shared. Telling the client you’re going to charge for a bid up-front is tantamount to saying “I don’t want the job”, I think, because the majority of contractors don’t charge to bid.
David, the cost of copying is minimal for residential work, no? Even a “credit card” GC has less than $10.00 of copies for what, —20 subs? 40 copies @ .25.
>Telling the client you’re going to charge for a bid up-front is tantamount to saying “I don’t want the job”
You probably don't realize the minefield you just wandered into... Good luck. :)
"The estimating costs are customarily subsumed in the fee, though, right? Preparing bids is traditionally the cost of doing business. It’s a tremendous challenge, no doubt about it, but the risks are shared. Telling the client you’re going to charge for a bid up-front is tantamount to saying “I don’t want the job”, I think, because the majority of contractors don’t charge to bid."
You are right. Preparing bids is traditionally a cost of doing business. Except for the best contractors, like Mike and Sonny. If you solicit bids, you may have to strike them off your list along with many others. When we give a competitive bid, we don't spend much time on it, just cover the basics and give a high figure. If we get it, we make a lot of money. If not, we haven't lost much. Does this sound like a good way to choose a contractor?
If, instead, we are chosen for the job and work to prepare a fixed price, we pore over the plans and consult carefully with the subs to get a very close approximation of the final costs and potential pitfalls. We are willing to do this because we know that we will be doing the work and that this preparation will not be wasted.
Cloud Hidden, thanks for the well-wishes! I’ve got a feeling I’ll need them.
SchellingM,
The concept of an unleveled playing field may pass in the short term, but the contractors that do not have a database set up to bid will not see the long term except in unusual and isolated circumstance I think. The field is wide open in this industry, and there’s bound to be a small black spot growing ever-larger on the horizon. Resting on one’s laurels is the game of gods, not men. If a contractor is simply throwing out numbers to potential clients, he may have intentions inconsistent with his goals, and never know it.
rex... the ones that don't want to pay it usually turn out to be more trouble that they're worth..
three examples.....
1: major remodel of a big victorian with additons and new wrap-around deck.... i spent 100 plus hours on the bid.... the job never got built.. tehy sold the house... i didn't get asked to bid their new house..
2: customers very impressed with my credentials... and my recommendations from friends of theirs.. major 3/4 tear down and rebuild (save the foundation ).. looked like another 100 hour estimating job... asked for a $3000 fee to prepare the proposal... never heard another word from them until a year later ( 9 months after they were supposed to start ).... they couldn't come to terms with their builder.....wanted me to take over.. i told them to try again with their builder and if they still couldn't come to terms...i'd be glad to pick up the pieces.. that was two months ago
3: tear down and rebuild... daughter's mother in law was the architect.. a commercial architect.. lots of mistakes and bad features in the design..
again i asked for a $3000 fee.. they said it was fair.. but that was four months ago..
they are still resolving some problems... in each case i was right... no fee, no workee.
i get fees to prepare proposals all the time.. i love the jobs people want to build.. and my request of a fee is not my way of saying that i'm not interested.. rather.. it's my way of saying that they are about to hire a pro whoi will really give them my undivided attention.. and if they can't afford to compensate me as an overhead cost of their $300K project .. then they should hire someone else.... some do... some don't...
best part... i don't work for free anymore .. unless i blow an estimate.. then it's my problem... not theirs
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike, exactly! I mentioned this thread to my wife who runs Tom's office. She told me during lunch that Tom received a check for $2700 for a job that was "ball parked" at about $180K. While out for dinner Tom called her to let her know he just left the condo of another potential customer whose "ball parked" price was about $300K and he walked out with a check for $4000.
Both checks were for two things:
1.. To get them on his schedule
2. For a detailed "fixed price" SCA.
Design work is a separate contract mandating another check.
Branding! It works.
And that's how professionals operate.
Meanwhile, the owner of a custom cabinet company stopped by, also today, wanting to meet Tom. It so happened Tom was there. This owner told Tom he'd heard a lot of compliments about The Lykos Group, Inc., and had recently turned down two large remodels because he doesn't have a GC license. He wanted Tom to look at another job he was about to turn down for about an $800K complete penthouse condo renovation in a high end high rise. He said he'd like to use Tom and in return, have Tom use his company for cabinets.
He is so busy, he's now looking for another saleperson to help his current one, and an additonal Project Manager. Anyone want to move to Naples?
As I've said before about "branding". Build it and they will come.
Hi! I read the string of messages. My husband and I put an addition on our home 3 years ago. We had a number of contractors review the plans and give us estimates.
We chose a contractor who's work seemed very good and who we felt comfortable with in attitude. Before we went any further we discussed in very specific detail our expectations and the materials etc. we were interested in. The contractor revised his estimate (upwards) which we expected and we still chose him. We didn't ask him the cost for the subs or labor - we trusted that when he gave us a bottom line price it was supported.
My husband (who is a real estate attorney working in house for a large financial services corporation which needs to update and change offices around the country constantly) wrote a very detailed contract. It was so detailed I was kind of embarrassed when he presented it to the contractor. The contract outlined our expectations in every room - from the crown moulding to the floor - that we had discussed with the contractor. We also had a contract that listed the price for the job (including the specified materials to complete each room)
Of course, it allowed for additional charges for changes. Our relationship with our contractor was terrific. To some extent it was because everything was "on the table" regarding our expected outcome.
However, he seriously underestimated one cost - trim -- . We had contracted him to replace every existing window and door (prevous owners went hollow core - we want back to real doors) in the house (1915) in addition to the addition. He made the decision not to reuse the old trim b/c he felt it was too brittle - but we had not asked him to do this (hadn't thought about it really) he really did this at his own expense and he did not ask us about this.
Because we liked him and his work and we didn't want to see him lose money on the project we voluntarily paid the additional amount - though we were not bound to pay him and he took a big risk when he made this decision without consulting us - we just felt it was the right thing to do. He had done right by us and his work was done with care and consideration. We knew that if he had added this into the cost of the job we would have agreed - this is because we trusted that he knew what he was talking about regarding the look and longevity we hoped to achieve.
(But I don't think he'll make the mistake again!)
I think if you have a good and explicit contract - and that means that you basically have to know what YOU want - that you really needn't worry if a product costs 2x more or less or it took him and his employees half the time or twice. Your contract is your protection and if it is clear allows both of you enough transparency to get your job done.
(p.s. certain things which vary widely in price and which we did not decide in advance we did buy on our own or had him purchase and repaid him i.e. tile and bath fixtures, fireplace stone, brick. )
We recommend him to everyone and our architect does, too. And both of them send potential clients to our house to look at the work.
Good luck.
I'd like to personally think you for your post. It is valuable here. The relationship and character's of both you, your husband, and your contractor is a rare business combination. Three people of "choice" character. I'm happy that you found each other since we live in an era where character and honor are being subordinated to the buck, people of your obvious caliber deserve to work together.
Owner's an contractors take note: What's right is right.
"Successful people form the habit of doing the things failures don't like to do."
Hopefully my computer doesn't crash like it did the last 2 times I tried responding to this thread. I think your (Sonny's) messages have all been spot on. Most of the things I was gonna say have since been said, so I'm not gonna dwell on those things. Spec the job ad infinitum, get a good contract. IMO a "bid" is a firm price for previously agreed upon goods and services, and I don't think the books need to be open for this. An "estimate" is exactly what it is, an estimate, and in this case the books must be open.
One thing you covered, but I don't think can be emphasized enough, is that there are going to be changes. It's a fact of building. HOs will perceive things differently once they see them in 3-D for the first time. Runner1 needs to budget for changes. From his message, ~20% over the 650k will "do him in." That seems to me to be running things a little tight. Maybe he's got some fluff in this number, but it still seems a little tight to me.
I've been on both sides of the fence (although as a sub, not a gc), most currently as a HO. With an old house I mentally budget 25-40% more than bids or estimates we receive for the several things we've contracted out, and every time it's worked out within that range. But, as you all know, even the most innocuous job on an old house is bound to have unforeseen problems. Not so with Runner1's job, or so it seems from what he's said. Still, regardless of the bid or estimate received, budget for changes so you're not stopped out before you're done.
Thanks for your comments, and especially as a subcontractor you can understand why I and my sons always hire the best subs available and never quibble about their prices. The best are the best because they are allowed to charge enough to do what is expected.
I did forget to mention one thing to Runner1 - that is the importance of what I call “invasive inspections” - (II) While we don’t know the particulars of his project, if it involves major remodeling and/or an addition the II comes into pay for one reason - elimination of surprises.
We often cut small holes in walls and/or ceilings to check for potential surprises. Or remove a piece of trim here and there for the same reason. Doing so allows inspection of wall and floor cavities. The IIs are done once it’s been decided that we are the contractor of choice. Neither the owner, the GC nor the subs like surprises that develop after the job has started. They create additional surprises in cost, wreck schedules, etc. All or at least as many of those “questions” should be addressed before the start date.
There’s a reason why if needing surgery, we go into the hospital (or lab) a day early for lab test and other “preparatory” measures. The same philosophy should apply when preparing to “operate” on a house or other structure. The same applies for determining if upgrades in code will be mandated. I know here in Naples, FL, if more than 50% of the house is to be remodeled, or if the contract price is 50% more than the assessed value of the building, ALL applicable trades or “systems” must be upgraded to meet current codes.
Those additional costs & physical changes can then be addressed by the owner and contractor in advance, and financial needs changed to allow for the “Contract Addendum” - what we use.
It was so detailed I was kind of embarrassed when he presented it to the contractor. The contract outlined our expectations in every room - from the crown moulding to the floor - that we had discussed with the contractor. We also had a contract that listed the price for the job (including the specified materials to complete each room)
Nothing to be embarassed by there..........my best customers are the ones who know what they want and are able to fully communicate that to me. On the other hand, I too must be able to communicate properly with them my concerns and expectations. Nothing worse than going into something with alot of questions and decisions constantly being forced due to time constraints.
I'm glad your project was a success for all party's and kudo's to you for talking up your gc.
Eric
If you ever wanted more opinions than you could handle - this was topic to do it!
We are having work done by a very reputable, highly recommended contractor in our (N. Calif) area and he provides each line item cost separately, then provides three surcharges--supervision (8%), profit (8%), and overhead--workers comp, general liability, taxes, etc. (19%), for a toal markup of 35%. At first it seemed high, but the way he built the quote, each item with the 35% tacked on isn't any higher than what I could sub it for myself. I assume that's because he has good relationships with his subs and gets a better price, but regardless of how he does it, it takes a lot of headache out of it for me.
If your guy is wrapping one or two of those items into the cost line, that could explain what will seem like a high quote, but may not acutally be. I'd recommend you focus on checking his references, especially those he didn't provide. I ran into several homeowners who had used my guy, but whom he hadn't provided as references. No one had a bad word to say about him--on time and on bid was the remark of all but one, and he blamed his experience on a sub, and said he'd still go with the general in the future. All of that to say "pound foolish" is exactly that. Get a comfort level that he's going to take the headaches out of it for you and it'll be worth every penny.
Edited 5/1/2004 1:04 pm ET by PlumbandTrue
Edited 5/2/2004 3:57 am ET by PlumbandTrue
Edited 5/2/2004 3:57 am ET by PlumbandTrue