Cost Plus Question

randybelk@comca

This question is for those out there that build homes on a cost plus percentage basis.
I am a builder (small operation). I have 3 employees and myself. I mainly do custom homes and a few spec homes.
My question is that I do a lot of the work myself with my crew. I work along side them and oversee the job and subs, etc....
Is it wrong to charge labor for myself while doing labor on the job and still charge the percentage on all labor, subs, materials, etc.
Also I get into a deal a lot where the home owner tries to cut out the percentage buy trying to purchase the bigger ticket items (cabinets, brick, fixtures, etc.) themselves.
Has anyone else experienced this.
Thanks in advance

Cole

I see nothing wrong with charging for your labor, it means nothing to the client, they would be paying someone anyway, so why not make it you? As far as clients wanting to purchase big ticket materials, what is there motive? Do they think they can get a better price, or are they not wanting the markup? I would find out why and go from there.

BTW- Welcome to the site!

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osborn

When customers buy their on stuff they are the ones that should deal with it. Be there to except delivery. Check for damage. Be the one to deal with material warranty issues.Ect. Ect. Customers dont understand why we mark up materials 20%.

randybelk@comca

Thanks for your input. The bigges reason they want to purchase themselves or run in the back door as I call it. is to save the percentage. They still want me to be responsible. Like you say, be there and take delivery, oversee to see its installed right etc.
I am just finishing up a very large home and it seems he does'nt know now that the percentage still applies. It's really not money matter. He seems to have plenty and is a prosperous business man. He just seems to think that it is not legal to chage labor and a percentage now. I dont think there is a problem, he is developing a sub division and I built his house. The subdivsion part of it is overwheming him. Having to deal with the state and all its red tape.
But anyway ,
Thanks

d-rez

No, that is common business pratice to charge for field work on top of a xx% markup. Field work is seperate from management. That's great when a customer wants to purchase things themselves, you cannot however warranty those items. -Chris

finehomes

I agree with chris. No warrantee. I had a client this past year with this same issue. Manager of a home depot. He did a lot of the material ordering and getting it shipped, etc. I only charged him half my normal fee on those items since he was taking care of a lot of the legwork. His cousin was the lender too so I didn't have to worry about the draw on those items or paying for them. It saved him a little money on his house, saved me a few headaches....and he tells everyone at HD what a great builder he had. WIN WIN for me. But....make sure you tell your client you absolutely WILL NOT warrantee any items that they purchase that goes in the home and put that in writing. That just might get him to stop doing it.


Sam

scottsanders250

Randy,

I hate to ask this, but do you have a contract for this house? If so, it should have noted exactly what the "costs" are (like all labor on the project, including yours) and that you set a fixed fee or percentage fee based on the total job cost regardless of who buys the material. If you're not using a fixed fee, at least specify what materials the client is supplying, and what the overhead and warranty details are for those materials. I deal with all of this before the contract is signed so when the bill gets sent to the H/O, there are no questions.

K. MISCELLANEOUS CONDITIONS

1. MATERIALS FURNISHED DIRECTLY BY CLIENT: Until substantial completion, any materials provided directly by the Client must be installed by the Contractor. Profit and overhead at the rate of x% will be charged on all materials provided by the Client. Client agrees to furnish the Contractor with copies of all receipts for all materials directly furnished to the project by the Client as soon as the Client delivers the material to the Contractor so that the Contractor can invoice Client for markup on these items.


Exceptions to the Contractor charging profit and overhead on Client-supplied materials are strictly limited to the following:



2. LIMITATION OF WARRANTY WHEN CONTRACTOR INSTALLS CLIENT-SUPPLIED FIXTURES AND MATERIALS: Contractor will warrant workmanship of Client-supplied materials for the same period of time as contractor supplied materials. Contractor will not warrant any Client-supplied materials or fixtures in and of themselves (whether new or used). If Client-supplied fixtures or materials fail due to a defect in the material or fixture itself, Contractor will charge for all labor and materials required to repair or replace both the defective material or fixture, and any surrounding work that is damaged by the defective materials or fixtures.

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Scott Sanders
www.mybrightleafhome.com

randybelk@comca

Scott, I like that addition to the contract. Where is a good source to get a cost plus pectentage contract. Also, in a cost plus type deal, I know it is a percentage or fixed on cost. I am curious as to what is defined as materials directly related to the cost. For instance, are we talking about just lumber, etc. What about things like tubs, sinks, heat and air, lights, etc.
I guess to really get to the point, it really comes down to what is in the contract. Could I send you an email.
Thanks,
Randy

Aggie67

We burden our labor rate with all of our overhead and profit. The markup on materials, 20%, covers the carrying cost of buying the material on account and profit. We have customers that buy their own, and it's fine, because we really don't lose all that much, and they are very responsible when it comes to ordering and scheduling deliveries. But we deal with corporations and GC's. I can see a homeowner wanting to buy it himself to save the markup, but he should be taught that the responsibility for ordering and delivery is his, not yours.

Also, most of the time we get better pricing because we order more. It ends up costing them the same, but it makes them feel better.

Bottom line, add a line in your contract or proposal that states any materials ordered by the client are the client's responsibility to specify, select, order, pay for, be present to accept delivery for, and inspect for damage prior to your touching it, and that you will refrain from installing the material until the owner notifies you that the material is acceptable for installation. When he balks, tell them what we tell them: you've gotten burned in the past with clients ordering the material and then changing their mind when it gets taken out of its packaging to be installed, and you then having to saddle clients with change orders to pack it back up and wait through the delay for new material. In simple terms, if the client buys it, it becomes the client's property once it leaves the vendor's loading dock.

And remember, the ultimate goal is to have the vendor hand you the material up the ladder for you to install. The further away you get from that ideal situation, the more it costs you.

scottsanders250

Aggie, nice post.

Randy,

Feel free to email me. The contract was put together from a number of different contract I've seen and reviewed/edited by my lawyer, plus updated to various issues that have come up with clients. Goo places for all types of contracts are your lawyer, your local Home Builders Association, or a good template from the Contractors Legal Kit. Also, the AIA has a standard contract, but it definitely needs to be edited and reviewed by your lawyer before using it.

The cost of the job is everything that is or could be billed directly to the job, and to your comment, whatever is in the signed contract. If you are providing temporary power/heat and using it solely for that job, its a job cost. If you are supervising that job or dealing with the customer 15 hours/week, that is a job cost billed at your hourly rate (which includes your labor burden).

Things get fuzzy for your bookkeeper's time, saw blades, pencils, etc, but hopefully that will be small potatoes for your contracts.

__________________
Scott Sanders
www.mybrightleafhome.com

randybelk@comca

Thanks for the input guys,
I charge 15.00 per hour per man (including myself when I'm on the job working as hired hand.) I then charge 15% over all time and materials. This is to include subs, my labor, all materials or items that go into the building of the home. Now, I dont mark up my labor rate on my men for workers comp or liab. or social sec. etc... That is why I have to have the percent on everything... I have gone into great detail with home owners, but they seem to forget. They always seem to be ok with the whole thing and pay all of it up to the very end. (like withing the last 30 days.) You know where i'm going.. ha ha!.
Anyway, I'm working on a contract draft and gonna make sure it is ok to do it this way.
Thanks again for all your input, has helped alot.
Randy

Aggie67

Randy, that's a really low rate. Maybe it's because I'm in a different market and the skills are different. If I pay a guy $23 (like an experienced welder), my T&M rate is in the low 50's. Foremen are $2-3 higher. Granted my insurance is probably way higher, and we do have true overhead (shop, trucks, salesman, PM's, etc), but I think you're still short selling yourself. And when we do contract work, the rate's a little higher (that's why we like contract work). And we charge for engineering and PM deliverables, like weld maps, code paperwork, end-of-job maintenance manuals, etc. Don't sell yourself short. We put together a model in Excel that tells us exactly what we need to be charging to make money. We update it every quarter, based on fuel, heat, rent, salaries, insurance, etc, etc. And we know how many men we need in the field to sustain the biz, and how much more money we make when we grow in headcount. And we know what the competition charges, and we're all in line.

I should open up a side business to set up systems like we have. But I don't think the 4 or 5 man ops would want to spend money on that kind of thing.

Roundtable

Just want to share an experiance i had cost plus.
The ho. wanted european fixture for kitchen/ baths, turns out, much to her surprise they, use different theards over there.
What a mess!!
anyhow, i use that story to stear HOs from self performing anything, "you hired me to do the job, so please, let me do it."

Brock

I would hire you to build all of my houses. You are leaving alot on the table mainly with the man hour rates at 1970 prices. Plus you have to insist on NO customer-furnish items. This is just sucking out your profit. The whole reason to do cost plus is to get 10% of everything,not just what the customer decides along the way to let you have. What are your end values at? For example, I have seen a dad on my son's football team go with a cost plus guy in my market and spend 180k, then turn and resell it for 350k. Laughing all the way to the bank. Seems to me this guy is underselling himself for no apparent reason. They would surely have been happy to put out 225k, anyway, right? Sounds like you may be giving your homes away just like this guy is.

monticellohomes

I have my contract set up that it is a minimum of 10% of the budgeted number, so if the HO wants to supply some stuff I still get money for the budgeted amount on it.

By the way, what is everyone charging in cost-plus? Seems like around here, SW Missouri, it is 10-12%. Mine is set up in that range plus money for other OH items like insurance, admin and supervision (usually not too much 3-10k) to help offset the OH I have. I'm just going on my own, had an investor for a couple years that was worthless and did nothing...so just trying to set up things so I'm making the money I should to cover OH and my salary (which is not anything unreasonable).

Big Sky General

Ever since direct buy started advertising I hear it all the time. The owners want to buy it themselves and let me deal with it. I put an end to it and whatever you buy it’s your problem. I had a client that bought his appliance and when they showed up the delivery truck just set them outside un protected. Of course it rained and the owner bitched at me for not putting them inside the house. Not only did we not have the equipment to move them but they would be in the way of construction. The owner had to hire someone to move them inside and learned his lesson. I even made him pay to have the cardboard hauled away. It seems like to owners just want us to do the hard and dirty work and not make anything off the easy stuff which makes up for the hard stuff. Everybody thinks it easy from watching flip this house or some other bs show.

randybelk@comca

Ditto, here.
Guys around here are getting anywhere from 10-25% on cost plus.
Thanks Guys for all your input. I was starting to think I might be way out in left field. I didnt think so, but sometimes people can make you wonder. I will continue to do as i have done, but Im gonna fine tune a contract.
Thanks,
Randy