[SoCalGC]

Hi all,

I am a commercial general contractor in Los Angeles. My question concerns how other GCs conceal their profit when invoicing the client with AIA form G703 AND submitting my subcontractor's conditional releases. More of my clients are starting to request that I use both G703 and provide my subcontractor's conditional releases when I invoice my client.

My approved construction bid was broken out by CSI number (trade), however I put my hidden markup on each trade in addition to an overall (visible) markup on the construction value. I've used the same breakouts in my G703 pay application...ex: Item #1: general conditions, Item #2: demo, etc. Now here is where I'm stuck, as I only see 2 bad options:

Option 1: Show the true subcontractor bid amounts in the SCHEDULED VALUE column and the true profit value as one of the Item #s. Therefore the amount being invoiced on subcontractor's conditional waiver would match the amount being invoiced in G703.

Option 2: Show the marked up subcontractor bid amounts and profit amounts in the SCHEDULED VALUE column per the original construction bid that the client has seen. I would still have to get conditional waivers from my subs, which would mean requesting them to provide "fake" conditional waivers with the marked up value (I have a good longtime relationships with them).

Obviously, both options are not ideal. Allowing my client to see my true profit would make change orders and future bids with the client much more difficult as they would have an idea of my true profit and try to negotiate me down.

Any ideas?

 

[bwiab]

Is it really true profit? There's lots of room to explain overhead. Hard bid or negotiated. The more sophisticated the client the more trouble you can get into by lying. If they think they are getting a great deal and question your profit, convince them they are still getting a great deal and next time hide it somewhere else. Insurance? Small tools? Any overhead expense that is hard to quantify. I would not have the subs lie for you... but that's just my opinion. Even with the best intentions, I can see many things going wrong there.

Or maybe tell them that after the work was awarded you busted your butt to negotiate buyout savings. You're entitled to that.

 

[Dan_Watson]

What's wrong with profit? Isn't that why we do this?

 

[fjn]

What's wrong with profit? Isn't that why we do this?

Exactly !

Those that do it for no profit call it a hobby not business.

 

[SoCalGC]

Thank you for the responses.

The more I think about it the more that doctoring up some conditional waivers seems like a bad idea. The client is a Construction Manager hired by the end user as their rep, and thus are somewhat sophisticated. The only reason I hesitate showing my true profit is the likelihood of the CM to hardball me for change orders and future work since they will have a relative understanding of my true profit margins.

I'm now thinking that the best way to go is to rephrase the hidden profit as overhead or self performed work.

Despite this, I'm still wondering if there is a better way. I can't image that commercial GCs using the AIA form G703 essentially provide an "open book" to their clients allowing all profit to be seen.

 

[CarpenterSFO]

The fake waiver idea is terrible and wrong.

I'm not clear about the terms of your contract. You have an explicit markup on the subs, plus your hidden markup. Does your explicit markup include an explicit profit margin?

 

[SoCalGC]

The fake waiver idea is terrible and wrong.

I'm not clear about the terms of your contract. You have an explicit markup on the subs, plus your hidden markup. Does your explicit markup include an explicit profit margin?

Allow me to better explain my approved cost proposal:
1. Demo: $10K (client sees $10K as cost but true subcontractor bid is $9.5K, remaining $500 is my hidden markup)
2. Flooring: $30K (client sees $30K as cost but true subcontractor bid is $28K, remaining $2K is my hidden markkup)

My proposal then shows the following:
Subtotal: $40K
Contractor's Fee 5%: $2K
Grand total: $42K

Thus on top of the visible $2K contractor's fee there is also a hidden profit of $2.5K.

I am being required to provide my sub's conditional waiver, thus my demo sub is only going to charge me $9.5K, whereas my client sees that I charged him for $10K. Hence the client is able to see the hidden $500 profit.

 

[PPRI]

Is there a reason you are being required to show your subcontractors conditional waiver with your subcontract amount? I don't generally perform a lot of commercial work and definitely not in California so I may be a little lost but I have never shown my subcontract amounts on a scheduled payment or payment release.

On the big jobs we do run the price I gave them is my price. Their contract is with me not with my subs. They don't get lien waivers or any other contract information from my subs. That is between my company and my subs. If they tried to require it I would tell them to kindly get bent. They contract with me for the job.

 

[bwiab]

This might be a dumb question, but can you do a lien waiver with a percentage paid instead of the actual value?

 

[CarpenterSFO]

It's a mistake to think about messing with the conditional releases. They're conditional on the payment of a specific amount.

Rather than try to figure out how to hide things, you need to adjust your negotiation and contracting practices so that you can claim the extra profit or management fee without reservation.

 

[bwiab]

I've worked for two very large GCs and maybe I learned bad habits, but all the Senior PMs had "slush" funds. We knew we would make mistakes and it was prudent to be able to handle some of those in house without having to get everyone involved.

For example we would agree to a GMP with 60-80% of the work bought out. We would have bids on the remaining work and add "slush" funds to them so that they were included in the GMP and then could use them through buyout savings. It was more for fixing mistakes than for ramping up profit, although I'm sure sometimes it ended up as profit. I don't see a problem with it.

 

[JaxBuild]

You may have other costs associated with the subs. Like provided material that would not show up on the subs release. Tell them that was how you negotiated the bid with them. Plastic, nails, glue, etc. Just because their contract was 28,000 doesn't mean you could not have spent 2,000 on other items on that phase of construction.