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help-need home builder payment advise

AAPK_lakehouse | Posted in General Questions on

I am trying to get some advise on custom home builder billing.
I am concerned that there is some double billing and want to get a feel for what is normal.
This is for a custom 4800 sqft custom home, passive standards, British Columbia.

When I hired the custom home builder, we had a gentlemans agreement (no written contract) that I would pay 15% contracting fee on top of trades/materials/expenses. Budget 2+million. When asked what I would get for this 15% it was communicated that it would include their expertise, organizing and management of the sub trades, call/liase for inspections, coordinate with myself re: changes to plans and perform other project management tasks.

I am now taking over as HPO 2 years later as most important details have been completed. 
I am now trying to figure out total amounts owed and come across some concerns with their billing. 

The builder now states the 15% contract fee includes: the overhead and profit for the company. e.g., Trucks, tools, equipment, shop rental, office expenses, accounting, legal, insurance, employee benefit expenses including WCB, stat & sick pay etc.

They are saying that no management was including in this fee and have billed all onsite management of the trades, meeting for permits inspections, liasing with home owner and are now calling this role “Site Supervisor”. This is the same person (custom home builder company=”Site Supervisor as an employee of the home building company”) 

So the builder is charging 15% on all trades, expenses, materials which over the last 30 months has accumulated to over $200k paid to him. Upon further inspection into his invoices it seems that he has been charging $60/hr for all onsite management including meeting with me to discuss details of build, manage the trades on site, liase with permitting etc. 
(Note: any labour he completed we paid $60/hr and have no issue with paying that as extra)
He is now asking that all the invoices in which he billed for time as “site supervisor” is eligible for the additional 15% contracting fee. 
Is this normal or double billing? 

So questions:

What does a 15% contracting fee normally include. Is this normal, am I being taken advantage of, is this double billing?
Wood a 15% contracting fee include management like originally discussed with builder? 

Any advise is appreciated. Yes i am aware I should have had it all in writing but I do not, so please offer advise with that in mind.

Thank you kindly,
K.

*Edit

Thank you everyone for your opinions. A couple things I would like to clarify. There was never an agreement I would pay a site supervisor on top of the contracting fee. I agreed to pay any labour he completed as he did help with lots of back framing etc. All of the invoices received over the past 2 years always stated “Labour” so I had no reason to questions it as anything other than that. I trusted this is what I was being billed for. It wasn’t until a high bill that I did and asked for detailed work logs. He frequently delayed invoicing, the big bill was from Sept-Dec 2021 and as soon as it was reviewed I started to ask more question and delayed payments. I requested monthly invoiced to better watch his billing, he again delayed and next invoice was Jan-April 2022. I have not paid that. 
No invoice, documentation, or conversations ever led me to believe he was working as a “Site Supervisor”, rather all supervisor/management tasks were apart of the 15% markup as we discussed at the beginning. I should add that most of his supervision (90%) was for he own workers that he had on site to help with back framing and various jobs like exterior insulation, fascia etc. 

I would like to also add that the contracting draws on the invoices were always in correlation with the markup on all the trades/materials invoiced during that billing cycle– it added up. Now he’s adding (at the very end) that $580K of labour from his own workers including himself as site supervisor is part of the contracting 15% markup. I am quite confused as you would think this would hav been added as markup on every invoice, thus I would have questioned it earlier–it was not.

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Replies

  1. Expert Member
    BILL WICHERS | | #1

    It sounds like you had a verbal agreement with someone to act as your general contractor (GC). A GC would typically do all the stuff you mentioned (manage trades, subcontract work, coordinate inspections, etc.), and 15% on top of whatever is paid to all the contractors is a typical middle of the road number.

    Charging extra for time sounds odd to me. For some examples from my own projects:
    1- I ALWAYS have a WRITTEN contract. This is for my protection and my customer. It's always best that both parties agree to everything up front to avoid surprises later. What you have right now is one of those "surprises", and it's much harder to deal with issues like this after the work has already been done.
    2- If I charge a fee based on a percentage of the project (which is common), that includes my project management services, which means my time to manage the project. I charge my fee based on anything and everything that goes into the project, all materials, subcontractor labor, etc. This is sometimes known as "cost plus" billing, because I'm billing whatever my cost is plus my agreed-to-in-the-contract markup percentage.

    If your guy was filling in as a trade (which is more common these days with all the labor shortages), I could potentially see him bill you that normal labor rate for that trade plus his GC markup percentage, which is the same as you would have paid if a contractor had showed up and done the work. I think this would probably be fair. I do not think it would be fair to bill a bunch of extras from "the office", which would normally be part of the project management services provided.

    The problem you have is that without a written agreement you can point to and say "we agreed x, you're now saying y", you're in a difficult position. This is where the argument is coming from. You may try casually mentioning that you might need to have your lawyer review your agreement, and see if the GC(ish) guys back off a little. As my dad, who is an attorney, likes to say "it's usually not legal action that gets things done, it's the THREAT of legal action".

    Bill

  2. Expert Member
    MALCOLM TAYLOR | | #2

    K,

    The absence of a written contract doesn't mean the conditions default to how things are usually structured. It just means it's a lot harder to prove what was agree on. Unfortunately I agree with Bill. You need to lawyer up.

  3. Expert Member
    NICK KEENAN | | #3

    If he's been invoicing you for two years and you've been paying, you're not in a good spot. I'm not a lawyer, but I read enough to know:

    A contract can exist in the absence of a written contract if both parties act as if a contract exists. If you've been paying his invoices for two years you've been acting as if a contract exists.

    There is a legal principle called "laches" that says if you delay in enforcing your rights, and that because of the delay you disadvantage the other party, you can lose those rights. See https://en.wikipedia.org/wiki/Laches_(equity) . In this case, the contractor can argue that had you raised the issue two years ago he could have modified his business practices to suit your concerns.

  4. nynick | | #4

    I'm about to hire a builder on a "cost plus" basis. He will receive 15% above all the subs costs and materials cost. He has already quoted me hourly rates for some of his guys if we need them, but that would be above and beyond the normal GC cost plus basis. To then charge me 15% (or cost plus) for his hourly workers is just BS.

    1. brendanalbano | | #7

      Maybe this is pedantic, but I feel like this often gets muddled in these conversations when trying to figure out what is "fair". In the end, the contractor is going to charge you what they have determined they need to charge to run a profitable business.

      Whether they bill their hourly workers at:

      $115/hr with a 0% markup = $115/hr
      or
      $100/hr with a 15% markup = $115/hr

      Doesn't matter as long as it is communicated clearly, right? ($100/hr just cause it makes the math easy)

  5. brendanalbano | | #5

    I have seen contractors structure their fees in a variety of different ways for our clients, including the way that your contractor is charging you. Whether or not that is what you agreed on is a different question, but that method of billing doesn't strike me as wildly unusual.

    Oftentimes the way the contractor does their accounting involves things getting marked up twice. This isn't necessarily duplicitous, although it is often confusing to the owner. I have seen contractors that charge the way your contractor is (charging hourly for their site supervisor, then marking up all costs, including both subcontractors and their own hourly supervisor by a set percentage). I've seen contractors who mark subcontractors up by a percentage, then add in materials and their own labor, and mark everything up again.

    Ultimately it shouldn't matter, as long as everyone is clear about how the system works and agrees to it and there are no surprises. Multiple small markups that stack up vs one big markup. Some things are excluded from markups vs everything gets marked up. "Hourly supervisor cost + markup" vs "(Higher) markup but supervisor cost is included in the markup and not billed hourly" can both result in the same total project cost.

    Unfortunately in your case it sounds like the problem is that you thought they were billing one way, and but they were actually billing another way. (I am assuming that they are not actively trying to scam you.)

    In addition to 1. talking to a lawyer, and 2. writing this off as a very expensive learning experience about written contracts, another option is that you could see if you could get in contact with the builders past clients and ask if you could see one of their bills. That might help you determine if the contractor always bills this way vs if they are doing something weird on your job.

  6. user-5946022 | | #6

    You are, as you know, in a weak position to negotiate. This is because a) you have no written agreement, b) "you" (even if through others) have been paying him on his terms for 2 years, c) if you don't pay him what he thinks he is owed, he can lien your house.

    Some of the posters have advised to "lawyer up." If you do that, you and he both spend money on lawyers, and none of that money goes to solve the issue each of you have, which is he wants to take in as much as possible and you want to spend as little as possible, and hopefully, you each want to do that in a fair and equitable manner.

    15% markup is on the low side in my area, HOWEVER, the markup would include site supervision and meeting with the client. It would not include the site supervisor actually performing any production work, as that is expected to be performed by subs. There is some gray area in there.

    1. So the question seems to be what activities would be reasonable to charge you $60/hour for? Meeting with you to coordinate and permitting: Both of these activities must be done and that is known beforehand. Did the builder give you any sort of estimate at the beginning? If they did, whether or not you pay separate hourly charges for this work depends upon whether the builder included such in their estimate. If you have no estimate (in addition to having no contract), I would be inclined to NOT pay separate for coordination work. That is why you hired the builder, and that is what you are paying them 15% for. This is especially true if the builder got their 15% markup on the building permits. Where do they draw the line on coordination? Are they also charging you hourly for coordinating and scheduling subs?

    2. You wrote:
    "The builder now states the 15% contract fee includes: the overhead and profit for the company. e.g., Trucks, tools, equipment, shop rental, office expenses, accounting, legal, insurance, employee benefit expenses including WCB, stat & sick pay etc."
    You also wrote:
    "He is now asking that all the invoices in which he billed for time as “site supervisor” is eligible for the additional 15% contracting fee. "
    Yes, this seems like double billing, unless you believe his site supervisor is highly compensated. You are being billed $60/hour. Unless the site supervisor is earning in the neighborhood of $125k/year, the $60 seems like a loaded rate that would include the same employee benefits that the 15% is purported to cover. In the states labor burden is usually 33-42% of the raw rate. So at the high end, $60/hour would be the burdened rate for an $87k/year employee.

    I'm unclear if your question is whether you should be paying 15% on top of the $60/hour, or if you should be paying the $60/hour at all.
    - If the first, the answer is no, no additional load on the $60/hr for a site supervisor, but it seems fair for a company principal if there is some effort they are charging for this is legitimately something that should be billed hourly.
    - If the second, the answer is "should" does not matter and you are probably stuck paying it since it sounds like the contractor billed it and was paid it for the last 2 years.

    Thus, negotiate. Offer to pay the $60 for site supervision, but no fee on top of that.
    The reality is that in the current labor market the contractors labor and labor burden costs have increased considerably in the last 2 years. If you think it would settle it and make the issue go away, and ALL OTHER issues are being properly managed, perhaps, in lieu of the 15%, you agree to a 5% surcharge on that portion of hourly labor incurred in the last year.

    In the end, think about what you would pay a lawyer, and figure that is spent money that you are going to pay the GC. Throw a bit more in there for the lawyer money you saved upfront by not hiring one to get a clear executed agreement. Second, think about whether you need the ongoing cooperation of this GC to finish the house and /or respond to warranty issues. If you think no matter what, the guy won't cooperate, this has little value. If there is a chance he will cooperate, put a value to it. Don't forget to include the value of your time and effort securing others to finish the work and/or address warranty issues if he won't cooperate.

    1. Expert Member
      MALCOLM TAYLOR | | #8

      User ...022,

      You are quite right - I should have said "consult a lawyer", with the purpose being to see where you stand. Litigating something like this helps no one.

  7. nynick | | #9

    And let's not forget you're discussing these costs with a builder who is in the middle of building you a $2M dollar home. Are you really in a position to verify the amount of hours the site supervisor (or anybody else) actually works? Even one extra (padded) hour per day would cover the builders 15%. Tread carefully my friend. He's writing up the bills.

    1. Expert Member
      MALCOLM TAYLOR | | #11

      nynick,

      Yet another reason never to work without a contract. Any decently worded contract anticipates it's own demise, and also spells out what happens in situations where conflict occurs.

  8. Expert Member
    Michael Maines | | #10

    I have seen site supervision be completely included in the markup, but more often part of all of it is billed hourly on T+M or Cost Plus contracts, or sometimes it's split--some activities are included in the markup and some are billed hourly. A contract should spell this out. A 15% markup is actually pretty low these days; I know builders who charge 50% or more on top of costs, but those may be fixed-price contracts where the client doesn't see the markup.

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