Customer Wants Cost Plus Fixed Fee

Virginia Built

I met with a client last week. They bought a waterfront house for 1.4 MM. They want to put about 300K in it , and have the work done by Thanksgiving. It's a tight schedule. We can do it. We need to start now.

He called me yesterday, and said there is a problem, his brither and himself feel they need a fixed fee contract. i told him, i can't do it, no way, because:

1> The job is not bought out yet, no selections have been made. We can only use allowances.
2> There are no plans, there are structural issues to be resolved.
3> It is a fast track job.
4> We have abasic business model based on cost plus 20%. We only do business this way.
5> I was charging 90 per hour project management fee for 100 to 300 hours per job, and cut that out this winter due to price resistance.
(you bet your ass when things get better in this country i will reinstate that fee though,,,lol)

Anyway, I need the job, does anyone here have any advice about fixed fee contracts if they continue to balk?

Thanks in advance...

Bob Kovacs

Sure- if you think it's going to be around $300k, figure your profit on $350k, and make that your "fixed fee". Then your supervision time, insurance, truck expenses, and anything else other than pure profit becomes "cost of work". They want it, they get it.......

genecarp

how could you possibly consider a fixed contract price with no job details or specs?

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joasis

specify the fee as "fixed" for the amount of days or hours in the scope of the work that is currently proposed. Then, when the real numbers come in, you win if it is less then proposed, and you can bill if it goes over. Simple, and the customer has the "fixed" fee.

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Davey

I agree 100%. Do they want what is technically called a Stipulated Price Contract? What does a fixed fee contract mean? If they want a SPC then you could break the job down into several mini contracts, each executing on the completion of the one before and independent of all the rest. That way you are protected from cost over runs from unforseen conditions and you have the option mot to execute one of the contracts. Each can have specific conditions attached to it, for example drawings, structural condiserations and so on.
Just to be picky, a FEE is a charge applied to administer or facilitate a contract. Just like a booking agent charges a fee for their services, but the contract is between you and the airline.
All this said, if they want to drop 300K then spell out what they will get for it and thats all. Otherwise say no thanks.

Heritage

Do it.

Step #1. Preliminary phase. Get a 10-20k deposit. Bill for your time, engineers, getting plans, permits etc. You have nothing to lose.

Step #2. You got a good idea what's going into this job, you billed for your time and you lost nothing. You got your plans approved, scope of work, budget.

My only advice is Preparation, Preparation, Preparation. You already said that there are structural issues, investigate with your engineer and base your contract off those findings.

Fixed price doesn't mean no change orders. It could mean a much larger profit margin for you if you tighten the reigns on your subs/vendors though.

Do it.

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Magic Hammer

Be careful, someone that can afford 1.4 mil and gets cheap on $300,000 is out to screw you. Like someone said break it into several contracts, design and plan, etc. in case you want to bale out.
Check out his credit, have the draws go thru a bank escrow.

hatchet

I think the biggest thing to lay out for an owner on a fixed fee contract is exactly what a fee is and what job costs are. IMO the fee is to pay for the management side of the job. That doesn't mean that the rest of the job doesn't get marked up for profit and overhead.

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Rich
WIT Construction Co.
Superior MT Contractor

RPortinga

I'll echo Hatchet and those that said to break it down in to smaller sub-project.

Be very clear as to what are job costs versus overhead. I had a client try to tell me that things like my site supe was "overhead".

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Rob Portinga - Bauer Bros. Construction, Inc.
Design/Build - General Contractor - Construction Management

kevjob

how can you bid with no plans? 1.4 m for the house and 300k for the work and they are hassling you? Sounds like a witches brew for trouble.

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Kevin
Basement Finishing Highlands Ranch Colorado
Littleton Colorado, Basement Remodeling
Kitchen Remodeling Denver

Davey

Hey Hatchet, that's a great Avatar.

Virginia Built

Well, currently I stay in the deal with the improvements suggested by a few of you... used as bargaining points in negotiation, but I did not agree to the fixed fee, it was unfair to my company.

As far as the clients money goes, they are very well off, obviously, and I've found these types to be the most careful with money and deals, so I'm not scared to "plat the game" with them, it's natural... they got rich by being smart with money so , hey, they get what they want as long as my margin is not diminshed. At this time , he needs to be ready to keep ahead of us and get selections back to us, because we roll on these renovation jobs.

So now we are at the point:

1. We have a cost plus percentage contract ready to ratify, with a cap on each trade or category which is still in allowance,, ie all of them right now. Once we reach a cap number, we have to change order the overage beore proceeding or the client will not be held liable. I found this to be quite fair, because we should have no problem change ordering these issues, that's only fair to the client.

2. We are going to baseline plan the house in Chief Architect for the client, do the framing plan, give him electrical and some plumbing selections to approve, and use these as a working plan.

3. We have agreed to work with a $25,000 deposit which a percentage of will be credited to the client with every two week invoice, a Virginia contract law.

4. The guy took out the kitchen to save money on overhead, but we are going to do the kitchen eventually because I have a line of cabinets we can sell him for less than HD or Lowes, which is where he feels he'll get the best deal,,,

5. We start work as soon as the contract gets a lookover by our attorney, and we ratify it. Should be about an 8 month job, we are pretty excited and are going to be looking top add a carpenter or two , soon.

wish us luck

ChrWright

Do you perform a lot of remodel work, or are you shifting over from new construction?

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Indianapolis Kitchen Remodeling Contractor - You Can Get There From Here

Aframe

Sounds like a similar situation to a project I worked on a few years ago with company I worked for, Cust wanted to get going to meet deadlines, had a big arch firm working on it. Since plans were not complete a lot of number were left at allowances. when we started it was around a $400 k renovation(fire damaged) they bought house for prob close to $850-900 k

It was a nice project so my boss worked a pricing agreement for a cost plus overhead to a certain dollar mount, then after that $ amount the OH was reduced. Change orders/extras would be added to original amount and OH would be at the higher rate.

Seamed like a good deal starting, it worked for the cust. to show we were not going to milk it, but covered us with so many unknowns going in.

Too many arch. changes (after a portion of work was completed, of course), showed we should of put a higher % on OH from the beginning.



Stay on top of change orders and paper work, especially if subs are working on a T&M basis. The guys on the job might not know if what they're working on today was planned from the begining.



I was with you until I read this,


[quote=
4. The guy took out the kitchen to save money on overhead, but we are going to do the kitchen eventually because I have a line of cabinets we can sell him for less than HD or Lowes, which is where he feels he'll get the best deal,,,
wish us luck [/quote]


Good luck with that.

Mike Finley

Yep, my thoughts exactly Aframe. There is a nasty, dirty little secret waiting to come out sooner or later in this job. Anybody buying a 1.4 mill house and making a connection to Home Depot for cabinets is F'd up. There's way more under the surface waiting to come out and bite you on this one.

Thoughts like "that's how they got well off, by being smart with money like this" is a huge rationalization and sounds more like trying to see the best in a bad situation because you're too anxious to get this job signed.

Most people who got well off understand VALUE. Your description of them sounds like they are cheap, there is a big difference.

I'm not saying you can't do this job, but I'd re-evaluate your relationship with them and go in with more open eyes. Switch your mindset to what they are really all about and be on your toes.

Virginia Built

Hey guys, thanks for your posts, to answer:

ChrWright,
we do alot of remodeling, mostly larger jobs on a cost plus basis, and almost no new work in the last three years. I have one lead man who is a seasoned 43 year old demo/reno veteran who can take the job and run it, figuring the structural issues are part of the job. We've gutted houses, tore the roofs off and added floors, and done completed facelift design build stuff as well. We're completely ready for this job.

Mike Finley, we have almost the same quality of cabinet coming from outside vendors who charge ALOT more for cabinets than Lowes and HD does. I don't know what these big boxes are offering in your region, but here, the big brands in the two stores are 1. Kraftmaid, which can build a pretty nice all plywood box with some nice door and drawer detailing. I plan on taking the line of cabinets we've signed to the level of a separate division in a few years. I'm going to sell them at a tight margin to break in at first, then move up in price as we add a showroom, etc. Just remember, we are talking about a waterfront place here , the lot is probably worth $800,000 alone. This client is no different than any other I've seen in the last year, they are all bargaining hard to save money. They know the market is tight for contractors and that we are less likely to walk in the middle of negotiation. I don't think there is any dirty little secret here, just a sharp client.

I have signed and returned the contract today, we start construction Thursday. I'll keep you posted.

hatchet

Thanks - just part of my logo.

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Rich
WIT Construction Co.
Superior MT Contractor

Virginia Built

I have reached the trim stage as of about two weeks ago. We are on good terms with the owner after going through numerous changes and plan revisions which have taken our job budget to $410,000, not including his extra work which he hired separtately as agreed in our contract and which added $110,000 in cost for him.

We had structural engineering consulting done to correct some unsavory framing done by previous remodelers. We had to gusset all the second floor joist framing with plywood to reinforce it. The remodeler there had decided it was okay to use the 2x6 ceiling joist on the roof he tore off as a floor joist for his pop up addition, all he did was lay a 2x4 on top of the 2x6, calling it a 2x10.,.

So we got the house gutted, reframed all the bedrooms and bathrooms to the new floor plan, plumbed, wired, new duct, new furnaces, roofed, sidded, and drywalled in 5 months, now the push to complete.

The client has been very good about paying, just takeing the allowed 15 days to pay. Communication has been good, and the realtor referring the job has been watching us, referred another similar client to us last month.

All in all, the negotiations went fairly well, and the client has been good to work with.



We hope to find three or four more like him for next year.

TigerFan

Glad to hear it's going good so far.

These two statements had scared the crap out of me for you:

"They want to put about 300K in it , and have the work done by Thanksgiving."

"Should be about an 8 month job"

Well, Month 6 + 8 months = FEB 2009! Yikes!

When customers are that far off in their expectations, it usually turns very rough at some point.

Best of luck!

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