All of my work comes to me through referral – my clients almost never have me quote against other contractors. They usually meet with me, ask me to design and build their house and we go from there!
This situation is great, except that without other prices to compare to, the clients have no real way to tell if the price is fair. And how can they have other prices, when they’ve commited to having me do the work at the very beginning, since I’m designing the place to begin with. We’re talking about half to one million dollar jobs here.
I’m trying to think of a way to be somewhat transparent, yet not drop my drawers. Maybe full transparency including disclosure of my profit is the only way to go here. Anybody else in this kind of situation? Any unique ideas? This is kind-of a unique problem, I realize. I guess that architectural firms that design-build are in the same boat.
Replies
damien... i don't know of any design-build firms that have transparency... are you making too much money ?
you are selling based on past performance...... they're buying
once your design is done, don't you give them a fixed price proposal ? they can accept or reject at that point
my take is this.. even if you gave the plans and specs to a comparable competitior, your customer would still not have any basis to compare the two prices..
a lower price might equal better value or lesser value..
you are building a proptotye that no one else has ever built.. and no two companies will build it the same..
let the market decide... when your customers stop signing up , you'll have your answer
Expand on your statement, Mike, and I know it is a deeply held belief on your part, that given a highly detailed plan set, specifications, 100 percent product selections, detailed room finish schedules, trim schemes and details, yadda, yadda, yadda, that two contractors would build two different houses.
Didn't you and I spend some quality time in commercial work, where the architect often rules like a king, and see work that simply HAD to match construction documents, period?
Why cannot an architect, or construction manager, or owners' rep, or savvy owner, do the same thing?
You may be referring to quality of work, but let's say that whoever is in charge knows quality in all levels and trades of the work, and simply demands it and gets it, throughout.
What is different then?
What if I have taken extremely careful note of every single thing, every little trick, every feature, every method, that you and your crews and subs did and do, and then document all that stuff into the specs, so that some other GC is required to do the same. Would that then make his work equal to yours?
Sorry to hijack the thread, and you were mostly correct, IMHO, in your response to the OP on the thread topic, but I am trying to understand your position.
And further regarding these differences, how many would be readily apparent to the average house buyer?
Mike, I've always been in this situation, and I've always made out fine - although in years past I've been known to drop my drawers now and then to seal a deal. The last couple of years, I've been trying to really get a handle on my costs, and actually make a decent wage and profit every time. A situation that I've run into in the past is: I'm the only contractor involved, I'm leading the clients through all the material choices and so on and later present a quote. The quote is always several pages of specifications, followed by a price, as per the drawings. I've had clients ask If I can break this down. In the past I have done this, but I don't want to do this anymore. One answer is: "I can break this down, but the price will be far higher, as every item must be costed as a single job not in conjunction with the other items.How would you handle these clients at the onset of this question? Keep in mind that these are still probably good clients, but anyone would be a little aprehensive about handing a guy half a million and no clue about the value. By the way, I've never once had someone actually call one of my references.
<<<<I'm the only contractor involved, I'm leading the clients through all the material choices and so on and later present a quote. The quote is always several pages of specifications, followed by a price, as per the drawings. I've had clients ask If I can break this down.
In the past I have done this, but I don't want to do this anymore. One answer is: "I can break this down, but the price will be far higher, as every item must be costed as a single job not in conjunction with the other items.>>>>>
my experience in breaking out costs ( "break this down " ) is that it is always used to beat me up at some point or another..
my answer now is this ......
" your project consists of 50,000 items in 25 categories..
in some i'm going to be right on, in some i'm going to be over, and in some i'm going to be under... if i've done a good job it will all balance out and i'll finish the job with a profit.. if not then i won't make a profit.. but breaking items out would be counter -productive..
if you have a specific question , i'd be glad to discuss it.. and offer you alternatives..
if you are not comfortable with a fixed -price contract , we can entertain a T&M contract "
Mike Smith Rhode Island : Design / Build / Repair / Restore
When you give your specs and estimate, you are at the stage of the job when you are trying to establish the basis of trust with the client and vice versa. The question about breaking the estimate down would not raise my level of trust in the client, but like you I have broken the estimate down. Often the customer is interested in exploring options that might make the project more affordable. Is this just beating you down? Maybe, but maybe it will allow the project to go forward. Maybe the client is testing you and if he is going to be spending a huge amount of money, he wants to understand you.
I don't think there is any one way to handle this. Preparation pays off but takes time that I don't always want to spend. I often rely on my gut instincts and experience. I don't spend a lot of time regretting this when it doesn't work out.
In terms of your competitors, try to be perceived as expensive. If you have too much work, raise your prices.
I agree with MikeSmith. If you are getting the work, the clients are happy and are referring you more business; then your process is working the way it should. When business starts falling off and you no longer get referrals, that is when you need to look at what you are doing.
Supplying your design to 5 differant but comparable builders will likely get you 6 differant quotes - LOL. it all depends on their overhead, quality of workers, where they think they can get lower cost but "comparable" materials, what their profit margin is, how hungry they are for work and so on.
So once again - do not worry till your business starts slowing down.
To me, the best way to be transparent is to work on a T&M basis. It is also the most 'honest' way to earn a fair profit, if you look at it from the viewpoint that a fixed quote always includes some 'ooops' percentage to cover the contractor's butt. And please, don't anybody read that wrong; I am not saying that working on fixed price quotes is 'dishonest', only that it's not as transparent as T&M because the fudge factor we all build in to fixed quotes is hidden from the client.
Resistance to selling a job on T&M is usually based on the fact that the client doesn't know till it's all over exactly how much it's gonna cost. Well, neither does the contractor. All they have is a ballpark, based on the contractor's experience and a detailed DCA ("Design and Cost Analysis"). That's not as bad as it seems, though. The contractor has a vested interest in making that DCA as accurate as possible, because if he gets a name for going way over estimate, he'll see clients shy away from him in future. Nobody wants that.
There are two ways I use to answer potential clients' objections to T&M: One is to point out that if the client is willing to share my risk, I am willing to take a bit less potential profit by eliminating that oops factor. The second is, if I am not being pushed in the a$$ to bring the job in below a fixed price, I can allow myself and my crew to take the time necessary to do it right instead of muttering to myself, damn, let's just close it up; it'll probably be okay and nobody'll ever see it anyway....
I don't think it appropriate to tell the client how much I mark-up on labour; that's my business and is determined by how much it costs me to enable that crew to work. But the mark-up on materials and subcontracts is fixed at a flat percentage, and that the client knows up front. I've never had anyone demand to see my source bills, but if anyone ever does, I will be quite happy to show them to justify my billing.
Dinosaur
How now, Mighty Sauron, that thou art not brought
low by this? For thine evil pales before that which
foolish men call Justice....
why?
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
why what?
Damien, this is a very good business question. The simple answer is that you cannot know if your prices are competitive unless and until you actually compete. The fact that a captive customer accepts your price doesn't mean much.
Look at the examples of GM and Ford's former in-house suppliers, Delphi and Visteon, respectively. For many years, they had captive customers exclusively and were regarded as doing very well. Once they were spun off, turns out they are not so competitive. Both basically bankrupt now.
You could be high or you could be low, or in the middle. You won't know without having a job up for bids and losing it. That way when it's built you can see how the quality compares to yours.
DG/Builder
best i can tell... they are paying for you
that means you have value as a designer and builder
as your client I expect you to know how to build what you design and how much it will cost and i expect you to tell me that figure... if it's what i want and i can afford it the only other question is... when will you start and when will you finish
I'll expect the quality you represented and I'll depend on you to do what you say... it's none of my business how and for how much you build my house for past that point... i want you to make a profit and be paid for your work... but thats not my business... you and only you as the expert should know how much...
as I am usually the purchaser I'll usually not go with "time & material" if it's your trade i think you should know what it will take to do the job and make a profit... I like set prices so i can plan and know if i can even do the project... I see T&M all the time where they send the slowest guys out and order the most expensive materials and never shop for a discount or even shop materials period... if they get a better price which might take work... they make less money...
If i was in the trades I'd love T&M no risk... lots of reward...get to try out new guys... shop with the guys who give me reward points toward trips, all while i have zero risk... I think if you are good enough to be doing a job (really so if you are the designer) then you should have a pretty good grasp on what it takes to get it done for me anyone who wants to do T & M on an already designed job just tells me they don't know enough to be doing the job... just my way of see'n it
p
"All of my work comes to me through referral - my clients almost never have me quote against other contractors. They usually meet with me, ask me to design and build their house and we go from there!
This situation is great, except that without other prices to compare to, the clients have no real way to tell if the price is fair."
why worry about "fair"?
Why complicate the issue by opening your books to each and every query?
If the price isn't "fair" to them ... they're not gonna buy.
Sounds like you are getting alot of good business and thru word of mouth advertising. Why rock the boat?
and as far as opening the books ... again ... why?
A great reply to that Q is ...
"No. I don't operate that way"
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Have any of your clients raised questions? Are you comfortable with what you're charging? I guess I'm missing something here. Why do you feel the need for "transparency"?
Have any of your clients raised questions? Are you comfortable with what you're charging? I guess I'm missing something here. Why do you feel the need for "transparency"?
Yes, some of my clients have raised questions. I guess when the clients ask these questions, they are really asking "wow, that is more than I imagined - do I really want to pay this much for this work" I think that this is a reasonable question - clients generally have no clue how long things take, what materials cost, etc. Maybe I just have to get used to sticking to my guns and saying "The price is the price - I've costed each and every item in the specifications and this is what they've added up to. If the price is too high, maybe we should look at downsizing the project or reducing the quality of some materials. One thing I've never asked is "what is your budget?" I think that this will now be one of my first questions. I mean, how can I design the parameters of a project for someone, without knowing what they have to spend? On the other hand, most of my clients have very deep pockets. Value is most important to them...Bye the way, I'm very comfortable with my price - I hire only the best trades I can find, and being a carpenter, I'm always surprised to find that my hired carpenters charge a few dollars more than I do per hour. I don't mind this, as I make profit on theirs and everyone's backs. I'm comforted to know that at any time I could go and work for another GC for more than I charge now.
Yeah, that can be a tough one - and it may not be possible to come up with a "one size fits all" answer. Some clients may be satisfied with the old "I do it better" answer and others may need more detail.
I generally get some numbers on the table early in the conversation - either by asking if they have a budget number, or by saying something like "What we've been talking about can cost between $XXX and $YYY. Is that within your budget?"
I also find it important to get a time frame into the discussion from the beginning. Customers seldom appreciate how long it can take to do their job. - lol
Lump-sum deals are the way to go, IMHO. The only "transparency" I will offer is in allowances for unselected products, and takeout or add-on lump-sum price options for modifications to material specs or scope.
But the communication that has led up to the proposal certainly has identified items that might be priced as options for the client to be able to save some money. I like to explore those items with the client in detail, before the proposal, so that when the option pricing is given, they will know exactly what is being priced.
An example here might be a base package using Andersen Woodwright series 400 windows, with an option to move down in cost to the Andersen series 200 units. The customer may have seen and selected the higher cost product, but he needs to understand exactly what the differences are between that line and the line that will be shown as a cost-savings option. If you don't make this clear before the proposal, you will regret the delays afterward while the client gathers info in order to make up his mind.
The allowance pricing that is given for unselected products needs to be explained in detail, as well. Furthermore, the base pricing needs to be calculated using selections and specs that the client has seen and understands.
You might for example price as a base (and calculated allowances) all of the plumbingware using Kohler's "Revival" series of fixtures, with white as the porcelain color and satin chrome as the metal finish. The client should have seen what all this stuff looks and feels like.
But any kind of a detailed breakdown? Never!
Damien,
I applaud your attitude.
May I suggest that you consider a "Cost of the Work + A Fee" arrangment? (Preferrably, from the client's view, with a guaranteed maximum price.)
Here you would charge a fixed management fee as your overhead & profit. Everything else would be a direct reimbursable expense to you. Labor, subs, materials, etc. Customer reimburses you for everything at YOUR cost, allowing for a very transparent accounting system. In a GMP arrangement, there should be an explicit contingency fund (for YOU) built into the GMP.
The advantage of this arrangement is that you retain some of the benefits of fixed price arrangement (i.e. if you do well, you make your money faster). Also, some of the risk is shared by the customer with the contingency fund, and the customer can see that you have no incentive to make the project cost more or take longer. In essence, you are simply saying to the customer, "I will manage your project for $40K (or whatever) and otherwise bill you for exactly what it costs me, although I'm projecting that it could reach a maximum of $260K" A fairly easy decision compared to "Just trust me that this should cost you $250K".
Further, you can act as your customer's advocate in helping get the costs down without seeing your fee reduced. For example, you could get three plumbing bids, discuss the pros & cons, and help the customer get the BEST choice for the project (not necessarily the lowest price). In contrast, with a T&M contract, your reward for helping the customer save money is making less.
Contractors that I've worked with that truly understand this arrangement can't imagine working any other way. Most, however, don't really get it.
Edited 4/3/2006 1:20 pm ET by RichardAIA
"Contractors that I've worked with that truly understand this arrangement can't imagine working any other way. Most, however, don't really get it."
There are three problems with this arrangement. The biggest financial problem is that the profit for the job is fixed even if the scope of the project increases. This is not a problem if the increase is small but in a design build project there are sometimes huge increases.
The second problem is the guaranteed maximum price. This has the disadvantage of a fixed price contract but without the risk premium provided by the fixed price.
The third problem is the nit-picking that can occur with a client questioning each and every one of your invoices. Anyone who has worked for an accountant(a cheap one) under such a contract might just as well shoot themselves at the start of the project.
Obviously these are the worst cases situations and problems can occur with any type of contractual arrangement. I merely point out these problems to illustrate that no one type of contract is without flaws and that we are all in fact dependent on the relationship that we establish and develop throughout the duration of the project.
Responses to each of these concerns:
1) If the scope increases, the fee needs to increase, as well. The customer doesn't get to add to the scope for free.
2) The GMP has a contingency fund included. There is no more risk to this arrangement than there is with a fixed price contract.
3) I believe the transparency in accounting actually causes LESS nitpicking. There is nothing to argue with. Obviously, not all contractors are set up to provide this level of detail. In that case, this arrangement will not work for them. It will only work for those who are reasonably sophisticated in their accounting systems.
Hi there, thanks for your interest in this post. Could you elaborate on how the fee increases with scope change; what sort of wording have you seen in a contract for this? Also, what purpose does the contingency fund serve if the job is T&M? Why not have no fixed limit in cost, since this is the main reason for building-in contingency in my fixed quotes. A prospective client I have is interested in choosing the subs, handling the money and being responsible for the over-all cost of the project. Basically acting as GC. I would basically be hired by the hour as a fine carpenter, with a fee for managing the job (based on my knowledge, experience and relationships with the trades). What I've been trying to figure out is how to incorporate this fee. Perhaps a modified version of your model would work.As long as I retain my profit and overhead I don't really care how the owner wants to play it, as long as I get paid in the end.
How much OH can you have just working by yourself, with no payroll?
An owner wanting to function as GC is wanting to cut you out of any margin you would place on materials, labor, and subcontracts.
Will this owner be an absentee dude, most of the time? Does he or she live and work in the city, and this job is way out at the country house?
A GC plans for, chooses, buys, and schedules deliveries of all materials. Is that how your client wants to do it?
Sounds to me like if you have no employees, will work solo on the job, but will be required to function pretty much as a GC's lead carpenter, then all you can expect to get is a nice hourly rate.
Is that OK with you? If the job goes for four months longer than originally anticipated, because of scope adds and changes, you will get four more months pay at that nice rate.
The AIA poster is describing a type of deal whereby a GC contracts with an owner for a job, and the cost basis is the cost of the work plus a fee, and that is not what you have described.
I am impressed by the quality and thoroughness of the responses thus far. It is a testiment to the value of this board. Kudos to everyone.I would like to add my $.02.1. You have an arrangement which is, by definition, different than most of us - you are Design/ Build. You are set up to build what you design rather than just manage. This is a fundemental mission of you company and to stray from that would be a change in direction. Nothing wrong with going either way just stay consistant. Stick with the business plan which has served you well.2. As the designer of the project though, there is one less buffer between the Tradespeople and the Client. This can be good for ease and speed of communication but it has a cost when fingers start to be pointed for cost overruns and errors. There is no built-in arbitrator. You are in "control" of the design and control of the construction. The Client only controls the $, however only in a reactive mode. The customary triad is now an unbalanced duet.3. It doesn't matter if people are buying a dog, lawn mower, car or house. They all want to be assured they are getting quality - regardless of how much they are paying. This current potential Client is no different, here.4. Your costs, O&P, F'ups, ect are charged to each job but are calculated in the aggregate. Meaning, on some jobs you may win big, on others you balance while still on others you may loose big. In the end though, you do okay. If on this job, the Client thinks he knows all your costs, yet isn't privey to the bigger yearly picture, he may think he is overpaying - if everything goes well. This will spark renegotiation attempts. If everything goes poorly, I assure you he will not want to renegotiate - because you have a Deal. See what I am getting at?5. Most first time GC's - DIY'ers and professionals - think their experience is typical of all GCs and since they can (attempt to) do it, don't/ won't respect the value when you do it. How many times have you heard a potential Client say " I would build this addition, it being so simple, but I don't have the time. I know it therefore can't cost very much..."?6. I think your best option is to break down the project by trade or room (only for Kitchen and Bathrooms), maybe finishes (interior and exterior) and give the Client options of materials. This way they have an integral role in the design, cost and time continuum.Choice of fixtures, appliances, trim, flooring materials etc are usually enough to give them a sence of control and interest without comprimising efficiency and assignment of responsibilities. 7. If the Client wants to truely operate as the GC - tell him/ her that they will then be responsible for liability insurances, confirming WC for all the subs, efficient ordering/ purchase/ payment of materials and sourcing said materials/ fixtures. AND this will require an increase in your fee % since your normal, established proceedures for doing business will be disrupted.One final note: A Client is not only paying you for your labor on their project. They are paying you for the wealth of knowledge and relationships which you have aquired over the years. Giving THAT away, even for a fee, creates more work for even less $$. It may even damage relationships you have worked so hard to forge.FrankieThere he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
Thanks for your responses. Yes, there are solutions to any potential problem which can be written into the contract but often these solutions dilute the advantages. They also lead to possible disputes.
For instance, if the scope increases, the fee increases. What constitutes a change in scope? One of the advantages of a flexible cost structure with a fixed fee arrangement is that changes can be made with regard to what is best for the owner and the house but not be affected by the contractor's profit motive. If the contractor's fee rises with the cost, how is this different from a traditional cost plus contract where the contractor's profit is directly related to the total cost of the job?
Obviously it is possible to spell all this out ahead of time, but it does require a lot of effort and care and still can leave plenty of grey areas that are subject to interpretation at the end of the job.
" The GMP has a contingency fund included. There is no more risk to this arrangement than there is with a fixed price contract."
There is no more risk than in a fixed price contract but there is also no premium paid to the contractor for taking the risk unless that risk premium is included in the fixed fee.
"I believe the transparency in accounting actually causes LESS nitpicking. There is nothing to argue with. Obviously, not all contractors are set up to provide this level of detail. In that case, this arrangement will not work for them. It will only work for those who are reasonably sophisticated in their accounting systems."
The only time I get any nitpicking is when I include a breakdown of labor, materials and subcontractor costs in the invoice. What is there to argue about in a fixed price? Even if you can produce the required documentation, it still takes time to do it and this is time that you would not have to spend otherwise. There are some jobs where this is necessary and we do it, but it doesn't produce a better house and does raise the price slightly.
I don't think that a cost plus fixed fee arrangement is a bad contract. I just think that it, like any type of contract, has strengths and weaknesses that are suitable for some contractors and customers and unsuitable for others.
I break the projects down into 25 line items with a price including my profit margin (40% on foundation work, framing, roofing. 15% on lights appliances plumbing fixtures) I don't show the profit per item or per job, just the value per item. Then I add upgrade and economizer line items (zero clearance fireplace vs RSF Opel, 3,000 lighting allowance vrs 6,000, 90+ gas furnace vrs geo-thermal) and assemble several different columns with different option packages adding up to different costs for the same blueprint and show how the cost per foot varies based on their choices. I'm not showing them my profit margin but I'm giving them the ability to adjust the price by adding and subtracting options and because it's in Excel I can pull it up on my computer while we are meeting and move options around until we have the house they want at the price they want at the profit margin I want. Because my margin is jacked up on the non-optional things like framing and foundation the more they economize the better my overall profit margin. It's been working real well for me.I also split my design contract away from the construction contract so if they feel like they want to get a second price from another contractor they can, nobody has done this to my knowledge for the last eight or ten years, generally by the time they have worked with us on the design they don't want to consider having any one else build the project but I like giving them that option and I like getting a check for the design because I have descovered unpleasent personality traits during design that have lead to me collecting the design fee and sending the client to another builder or to convincing them they need to be an owner builder.The process is better described at my website http://www.dyss.net/chandler/article.php?story=20060301064333743 I hope this is helpfullMichael