Best Sales Method?

RayT

We are a General Contractor specializing in custom homes. We build middle to high-end homes on owner’s property. We have only 4 employees and subcontractors under contract to us perform all construction. We have 10 to 12 homes under construction at any one time.

We utilize a cost-plus method of sales. We obtain proposals (bids) from our subs and, based on those bids, prepare estimates of construction costs. We add a percentage for overhead and profit, usually 14 to 16%. This percentage is clearly known by our customer and is written into the contract. We do not guarantee construction costs. Customers are invoiced monthly based on progress of construction. Customers may review invoices from subs and suppliers. As a result, our actual profit (after deducting overhead costs) approximates 2%, obviously less than the desired 6 to 8%.

As I understand, another more popular method is to contract for fixed-price construction. Wher the sale amount is negotiated at the beginning and unchanged throughout progression of the project, unless a change order is created. From everything I read, this is the recommended method, although there appears to be more risk relative to fluctuation of materials cost.

From a practical standpoint, what are the pros and cons of each of the above methods. Any opinions/comments would be greatly appreciated.

Mike Finley

Not to be a jackass, but I am having a hard time comprehending how a company that is capable of having 10-12 homes under construction at the same time is in need of the information you are requesting.

Additionally it appears quiet obvious to me that when you say you are adding 16% for overhead and profit but are ending up with a 2% profit that this simply means you are really adding 14% to cover overhead and 2% for profit. I'm kind of scratching my head over the whole thing.

Floorwizard

I agree, congrats on building so many per year.
I would wonder why thinking of changing.

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"in 20 years you will regret more what you did not do than what you did"

Grumpy

I would say cost plus favors the contractor and fixed price favors the customer. I bid all my jobs fixed price but I am not a builder, I am a service contractor dealing with many customers daily.

In my business 15% overhead seems to be the average most guys are reporting, but many guys like to add 10% or more for profit.

RayT

I'm not the contractor/owner. I'm the General Manager and my experience is in various types of non-construction businesses. I'm in the process of educating myself in construction management and I was hoping to get some positive feedback from this forum. The company made a major change 2 years ago, moving from a renovation/remodel market to new construction market. The company has done well over this time. However, we are trying to develope strategic plans for future years. Everything I read indicates that, after covering overhead, including reasonable salaries for all employees, there should be a 6 to 8% profit. We would have to increase our overhead/profit % to +20% (or reduce overhead by 4 to 6%). I would just like to know the methods used by other builders. Again, any and all comments are appreciated.

Glasshousebltr

I think your going to have a hard time increasing your profit with only 4 employee's, then riding the subs to the bank.

Employ some tradesman if you want to enjoy the profit, a home construction management firm is a home construction management firm........nothing more.

Another thing, how do you keep 10 to 12 houses a float on just sub's. It takes 4 people on 4 homes in just clean up, prep, and materials.

Bob

Bob

Grumpy

The way I look at it, If I am a builder I shouldn't ever have to worry about materials except allowing a staging area to a specific trade so trades don't fight over space. I'd also hire a cleanup crew to do the cleanup.

There are many clean up crews around that will send in 4 gals and have the interior of the house spotless in one day. When it comes to the exterior, usually the landscapers take care of all the exterior cleanup. At least that's just how it works around here.

In theory a building can go up with one employee managing the building, making decisions, and not much more.

TimWieneke

I was raised in fixed-price sales. On the other hand - we operated in a very low-overhead environment. Ray, I'm gonna shoot you a PM. I'd like to talk with you further on this.

Tim

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As Steve the Foreman would say, "Forgive him Lord, for he doesn't know what he's doing."

RayT

Bob,

The answer is tight scheduling of subs. Minimum slack time between subs and, if possible, two or more subs working on the same site. All projects are in different phases from excavation through finish carpentry. BTW - we even sub out the cleaning. One employee (Project Manager) can manage up to 6 projects.

Ray

Grumpy

Wow I would say one good project manager can do multiples but 6 projects would be a stretch of my imagination... just driving out to 6 job sites daily would fill anywhere from 6-12 hours.