Fee from GC confuses me
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Hi there,
Plan to build a house for my family, and we received a budget from the GC. I understand there should be a markup for a GC, but I found before the markup, there is a construction management fee that costs around 15% of the cost to build already involved. By this, the budget becomes: (cost of work + management fee) x 15% markup, or (cost of work x 1.15 x 1.15).
I understand that anyone doing business needs to make money, but this seems kind of strange to me. If anyone has ideas about this fee structure, please help.
Thanks a lot.
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Replies
Jason,
If you are confused by an estimate provided by your contractor, the first step is to talk to the contractor to make sure that you understand the estimate he or she provided.
A contractor can propose any type of fee structure they want, of course. But you need to feel comfortable with the fee structure before the project begins.
A general contractor provides a lot of services and performs a lot of work. If the G.C. is doing a good job, he or she will take responsibility for all work performed on the job site; will provide insurance during the construction phase; will communicate with subcontractors and schedule their work to ensure a smooth schedule; and will provide a warranty for all work performed, including the work of the subcontractors.
Thanks for answering, found a article says" A contractor who bills you for his management time on-site or off-site and then adds markup on top may appear to be double dipping.'' Is that true? I really not so sure about this, in my case, the management fee plus mark up on top and mark up on others will actually giving 30%+ mark up on total. Dose a GC charge this high for new build house? Should the management fee charge markup on top? Please help, thanks.
Ask the GC to give you an example of how the fee structure works. Then you can decide whether to accept the proposal or not. Adding 15% and 15% would be high where I live, but maybe not where you are.
I agree that the ~30% total seems high. I also want to caution that just those numbers don't tell the whole story. A GC who knows who the best sub-contractors are, and has a good relationship in which they know he holds them to high standards, and who will actively manage the job, anticipating the problems, keeping an eye on the budget and advising you on decisions to save money, and insisting that the subs fix their mistakes, is worth that. But you'd need high confidence that you are really getting that level of service. It might be that another GC would do it for less and do a better job.
A good GC can save you from needing to do a lot of research on each subcontractor, but I don't know of any way around needing to do extensive research to find a good GC.
A good GC will do good work in their client's interest regardless of the fee structure, paying attention to doing the job efficiently and well. But when thing go awry, a client can start to have doubts about the incentives the GC is following--if a mistake leads to a cost over-run for the client, and at the same time the GC's profit goes up (because it's a percentage of the total), the client can get suspicious. It sounds like the proposed fee structure contains a fixed fee and a percentage fee. Aside from the fact that the total rate seems high, I like that structure. The fixed fee gives the GC an incentive to finish the job quickly and efficiently, and helps avoid the impression or reality that the GC is profiting from each mistake. A fee structure with only a fixed fee might be a good idea, but that could lead to the impression or reality that the GC is finishing the job as quickly as possible without regard to quality in order to get the fee and move on.
Management is, in many ways, the most important service a GC provides. You could go out and hire all the individual trades yourself, but you probably wouldn't know how to schedule them or make sure they did their jobs.
Your GC could just as well have charged a fixed amount instead of a percentage for management. I don't know that 15% is high for that service but presumably the amount covers his cost for performing the work, so adding 15% markup isn't double dipping - it's providing him overhead and profit on work performed, just like with framing or plumbing.
What if any information is the GC giving you about the total cost of the project? While it is appropriate to consider the percentages they charge, how they charge them, and what incentives that creates, I would really want to know what the final cost is going to be, within a fairly tight range. There's no reason a GC shouldn't be able to provide that, unless your project involves a wild new design, lots of unknowns or likely snags, or perhaps isn't even designed yet and is going to be a design-as-you-build deal.
15% + 15% is a little odd for a residential construction job, but insurance companies often pay 15% overhead + 10% profit to contractors doing repair work, so the percentages really aren't that high. Depending on how the cost of work is calculated, many contractors are shooting for markups in the range of 30-50%. You could drive yourself nuts thinking about percentages all day and wondering if they're right... what I would want to know if how much the project is going to end up costing, and what I'm getting for that much. That's how it works when you buy everything else you buy in life.