Should builder charge separate overhead & profit when using a cost plus % contract
I’m in the process of hiring a builder and three of them agreed to provide a “cost plus percent” quote.
They all independently came up with the same percentage, so it wasn’t a figure I was forcing on them.
One of the builders I was leaning towards using basically gave me a cost-to-build price without providing a breakdown. I asked him to break his costs down for the sake of transparency, which he did…however when broken down, the costs added up to $25,000 less than his original quote. I asked him why, and he said the rest was for profit and overhead. I had the three builders fill out the same breakdown sheet which included categories for permits, insurance, port-o-johns, and “other”.
The other two builders didn’t have a separate profit & OH allotment that hadn’t been accounted for in the other categories (for example, one builder added misc. expenses for $500). I was under the impression that the builders profit and overhead was coming out of his “cost plus” percentage.
Is this builder double dipping using a combination of cost+% and cost+flat fee?
I’m not sure if this is the proper forum for this question but I had good feedback the last time I asked a question on here.
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Adam,
Builders aren't accountants; they are builders. Their job is to submit a bid; your job is scrutinize the bids and ask questions. Don't sign a contract until all questions have been clarified, and the language in the contract is clear to you.
Builders certainly have overhead costs, and builders certainly need to make a profit, so overhead and profit are both legitimate. How these items are accounted for and how the total bill is presented to the client varies from builder to builder. You are right to ask questions, but there is no reason to assume that any of your bidders are crooks.
If you have builders willing to give you a price breakdown, have them list every single item that is included in the "direct job cost" category, and then explain what their fee is and how it is determined (flat or percent or whatever). If one guy is showing overhead above the line and another has it coming out his markup, you can't compare easily.
What are you building and why did you decide on Cost Plus?
There's also a method called Cost Plus Fixed Fee you might want to look into.
Great discussion. Out of curiousity, what exactly IS the percentage you were presented with? I'm small-time, but jobs are getting bigger, have to move beyond strict Time and Materials, which has worked well up till now. Can anyone recommend a source that addresses this plainly, with numbers? I figure it varies widely, and probably this is the kind of thing that no contractor would talk about openly on a public forum.
Adam, one way to write this type of agreement that I have done is to charge a set fee for my service as the project manager and then charge a set percentage over the cost of subs and materials along with a set fee for change orders. You can write up agreements any way that you can get each to sign. I have had good and bad experiences with both highly detailed agreements and hand shakes.
Had a line once that said paint the exterior.... But found out this included the Block foundation because it said all the exterior! I then offered to paint the roof and Windows and all the exterior.... Since I had no expectation of Painting the foundation. After that I found out there is more to contract details than contract details.... My what gets painted example is brought up now before work starts.... Same with mentioning how most people will add to a project during the project and that it is an added cost.
Of course we would talk about it openly. Industry-expert recommendations are easy to find online and in books (read Michael Stone's "Markup and Profit") and vary a lot with the type of work you do, and how you do it. Markup in the 25-50% range is typically recommended. If you're a remodeler doing a variety of small/medium projects you will need to be in the upper end of that range. Production builders using all subs might be lower. Of course, how you define "job cost" is crucial.
Dan, I'm having a 2,500 sq ft. ranch house built in Northern IL. I really didn't want to do a fixed-price build for obvious reasons. I asked the builders for their alternative suggestions, and they all independently said they could do a cost plus 6%. I do like a cost-plus-fixed-fee structure as well, but I'm not sure any of the builders I interviewed have done it that way before. Now, whether my lender will let me do cost-plus may be a different story. From what I've read, some states have banned this method, or at minimum require you to provide a "not to exceed" price in the contract.
Andy, I imagine the percentage varies greatly based upon your location and situation, but if one of the builders I had interviewed gave me a quote for cost-plus 25% I would've sh*t my pants right then and there. Even with one of the builders tacking on an additional $25,000 for "overhead & profit", that still only puts him at about 13% of the total quoted build cost. (Still more than twice as much as the other builders charging 6%, but nowhere near 25% as David mentioned). Like he said, 25-50% may be more suitable for reno/small work, perhaps not for a GC who is subbing out an entire build and has no other employees to account for.
*Disclaimer: I know I'm going to get a lot of backlash for posting percentage details because some contractors will say this percentage is too low. Please keep in mind, this is the rate I was given by three GC's independently, and will vary greatly depending upon many factors, including your area and the level of expertise of the builder.
When you buy a contractor, you buy tax, liability insurance, workmans compensation, disabilpertinent ty, FICA, healthcare, retirement, time, materials, subcontractors, plans,, permits, meetings, sales time, hand holding time, travel time,supervision time. Fuels, electricity, temporary power, just to name a few items.
6% profit after all costs including all overhead and site supervision costs is fair .
This is also possibly equal to 25% over the cost of subs and materials. The 19% covers the pertinent other items listed above.
AJ, you're right, you only named a few, there are no indirect costs on your list. If I could get every single penny of every single direct and indirect cost included on the job cost schedule, 6% *might* work out. The way most contractors do it, it's nowhere near enough.