Cost-to-Build Quotes: Profit and Overhead
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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Replies
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.
Is it reasonable for a project manager to bill for his travel time to and from the project? And, is it reasonable for a contractor to charge profit and overhead (15%) on the project managers' billables?
Is builder's risk insurance typically a separate line item cost to the client? And, if so, is it reasonable for the builder to charge 15% overhead/profit on it?
What overhead items are typically included in the estimate?
Thanks
Geoff
We typically charge our percentage on top of EVERYTHING that goes into the project. That means all the time and materials for all contractors. We don't charge a percentage on our design services, but those services are billed seperately (we do specialized work, and do engineering and GC work for the projects). We don't generally charge for our travel time to and from the jobsite unless it's very far away (in which case we'll tell the customer up front during contract negotiations), or if we're on a project out of state, where we bill for a hotel and travel to the hotel from our office -- but then we don't charge for travel between the site and the hotel.
Insurance is not usually itemized out as a seperate cost unless there is some special requirement, or if you have requested something extra like a performance bond. If, for example, I was asked to carry a $10 mil liability policy, we would bill for the extra since we normally carry $5 mil. Any special riders requested by the customer would be billed through. Standard liability insurance as well as any other items we specifically carry on our normal policy (we have some special riders we carry all the time for various reasons and needs) wouldn't be billed. Basically if the customer asks for extra stuff above and beyond what we do for our normal buisness, we bill for that extra stuff, but not the "normal" stuff we always carry.
We will usually provide a list of exclusions and concerns to our customers. Exclusions might be "we are not responsible for your private underground utilities", because we don't know where those are, and they won't be marked by a miss dig call. Concerns might be (I just did this today for someone) issues building near a designated wetland, which may require special permits or a more detailed survey to ensure we aren't in the protected areas. We try to provide our customers with a reasonable idea of what they're getting into when we put our initial contract together, since neither we nor our customers want any surprises down the road.
You want a GC that is at least trying to be fair with you up front. That means telling you what they will charge, and when. It should be no problem for the GC to provide an "accord" form detailing whatever insurance coverage they have, this is usually known as an "insurance cert" in the trades, but the insurnace guys call it an "accord form". That form will detail the coverage limits and types of coverage on the policy. 10-20% is a typical range for GC's fees, with that percentage over the entire project. Smaller jobs will likely have larger percentages, since the overall dollar amount will be less. Very complex jobs will usually have larger fees.
Bill
You realize this thread is from 8-1/2 years ago?
Yes, but it's an answer to a new question related to the original, which seems reasonable.
Bill
Builder risk policy the way I understand it is much like your home owner’s insurance should some covered disaster accrue and the home was damaged before it is complete and the home owner’s insurance policy is issued this policy would cover most of the costs to repair the damage.
Bill if one of your jobs should happen to burn to the ground when it was 95% complete what insurance policy would cover the loss? The policies you mentioned seem unlikely to cover an act of God.
When I built my home the builder risk policy was a line item in the budget. Seem correct as the build bought a policy to cover just my home and incurred an additional expense.
Walt
The normal policies cover liability type things, normally something like one of our guys broke something, hit something with their car, etc. Our policy also covers someone stealing our tools or materials.
Since we aren't normally building new buildings, we're doing work inside existing buildings, this isn't something that comes up for us too often. I know you can get special policies to cover under construction structures, and I believe those policies are written for each project specifically, similar to a homeowner's policy that is related to the value of your home. If we were asked for such a policy, it would be an extra -- more than we normally carry -- and we'd have it as a line item on the contract.
Regarding a fire, that wouldn't normally be a liability policy unless one of our guys caused the fire. If the fire was from something like lightning, that would probably be the building's policy. That's an interesting question though when in regards to incomplete projects, and I'll probably ask my agent about it since you've made me curious.
Bill