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Charge O&P on....

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Discussion Starter #1 (Edited)
Overhead & Profit applied to ?

I had a customer who is asking me to arriange my estimate with no overhead or profit on insurance or general conditions. I have never been asked this before and am not sure what to think.
Is this typical or???
 

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Discussion Starter #3
It's a good sized job, 6mil+, and we usually give a detailed estimate to the owner for this size of a job that shows our O&P % and what it applies to. I've done a few jobs this size and bigger and this is the first time I was asked to do this.
 

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Discussion Starter #5
The issue I am having is that I have always applied my O&P to the bottom line, including insurance & general conditions and this owner is trying to get me to do O&P on "hard costs" only. I do not want to do it as I would loose $30,000+. I have looked through the AIA info and did not see and standard on what a contractor was to apply his O&P.
 

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While not a hard cost like bricks or lumber insurance is a cost that can be allocated to a particular job. Assuming this is a time and materials contract where the customer is billed for anything and everything related to the project including on site office expenses,it is reasonable to exclude overhead items such as advertising and main office overhead.
 

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ContractOne said:
Is this typical or???
This is really rather an exercise in putting certain beans in some jars and other beans in other jars. PWG is right - the price should be the price.

That being said, I've played this game many times in a number of different versions. If my 14 year old daughter was pitchin' a ***** right now about being late for some party (that I'm supposed to be taking her to) I'd explain further. It'll have to wait for now.
 

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I apply markup differently than many contractors. I don't use a percentage usually. What's this going to cost me to do (labor & material & equipment rentals etc...)? How many days (I know how much it costs me per day to run my business this is overhead)? How much profit do I want to make (an arbitrary number based upon alot of variables)?
 

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This is a major red flag for me. You are working to come up with a price that the market (customer) will bear, make a living for yourself and your crew. I have found in every case, it's just not worth it to play these kind of games. BTW, I got my first GC lic. in 1977.
Send'em down the road!!!!
 

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I can't get an accurate picture in my head of work of that magnitude, but if it were a homeowner asking me that I would politely say: "This is the total cost that I estimate it is going to take to do this job in a quality fashion, gaurantee the results, and have it last for a long time. I can move the numbers from the bottom to the top, or the top to the bottom, but the number is going to be the same." If insisted, I would increase the percentage on the hard goods to cover the lost income, but you have big money here to worry about..

Jon
 

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Discussion Starter #12
All good points, and they all make sense.
Contract is a GMP with a savings, 70/30.
I do not want to send the client "down the road", with the understanding that he may be a difficult one. It is a high proffile job, good exposure for us, and of the 42 units 38 are sold before we break ground so money is there to pay. Client could also be a good long term client.
You guys are right, on a smaller job, lump sum, we give the client a bottom line number with a detailed list of what that includes, take it or leave it. But when larger numbers come into play things change.
I believe that O&P should be charged on top of the bottom line because;
General conditions are specific job costs only (job trailer, trailer phone, job truck, etc.) and while we do not need to manage a general condition item quite like a subcontractor or supplier (lien waivers, contracts, scheduling, etc) we still have to spend time in our general office aquiring those things and writting checks to cover the cost of those things.
Amy I in left field or does that make sense?

Bryan
 

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My experience with showing OH&P in estimates relates solely to the documentation of Change Order costs. In such instances, certain Contract agreements have stipulated exactly what costs will be allowed and the amount of the "FEE" (as a % of costs) that may be applied to the various costs. In some cases the Contract even sets forth which publications will be used as a basis for various rental rates and equipment costs.

The trick to making the whole thing work for both you and the customer is understanding what the rules are (for valuation of costs) and what adverse consequences you might be impacted by later as a result of establishing, up front, the various and detailed cost expectations.

Finally, you will likely find that in order to keep the OH&P percentage down at a level that the customer sees as "reasonable", while still keeping the price at an amount that you see as equitable, will require the itemization of a myriad of costs that would otherwise likely be lumped into "overhead".
 

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ContractOne said:
I believe that O&P should be charged on top of the bottom line because...
You're reasoning is sound. Sometimes what comes into play are factors on the Owner's side that you may not be able to know or otherwise influence. The Owner may think that General condition costs are "overhead" so charging an OH fee is a circuitous application of the fee. As ridiculous as it sounds, it's often a matter of shifting costs out of "overhead" into job cost columns to which a fee may be applied.

One mechanism I've used with some success over the years is applying the fee as a "markup" of the costs rather than a percent of the costs. A substantial gain is realized by accounting for OH&P as a "markup" (10% markup = cost divided by .9) in lieu of accounting for OH&P as a staright percentage of the cost (10% fee = cost x 1.1). On $1M worth of job costs the fee difference is $11K. The need to show profit as a minimum percent of the sales price, or contract amount as it were, (which is what "markup does) is relatively easy to substantiate.
 

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Discussion Starter #15
One other thing that I just though of was somthing that an acrhitect asked me the other day;
He had an estimate from a GC that used a circular calc to figure O&P. So you would figure the O&P on the bottom line after O&P was applied. See attached file.
Has anyone ever seen this or used this before?
 

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ContractOne said:
He had an estimate from a GC that used a circular calc to figure O&P. So you would figure the O&P on the bottom line after O&P was applied. Has anyone ever seen this or used this before?
There's nothing circular about it. That's how MARKUP works. A 12% markup is equal to ( cost divided by .88) ). This technique results in profit being expressed as a constant percentage of the agreed upon PRICE. In the example you show, 12% of the PRICE is profit. In an instance where you might agree to a 15% MARKUP, profit will equal 15% of the PRICE (cost divided by .85).

Depending on the amount of job cost, the difference in the way your fee is calculated can be very substantial. With a contractor's fee of 10% MARKUP, instead of 10% of the cost, it would take about $2.7M in costs to make up the $30K difference you mentioned earlier. ($2.7M divided by .9 = $3M vs. $2.7M x 1.1 = $2.97M).

The big difference (besides the money) between the two methods is that when your accountant performs a financial review of the job, he will report profits (as a %) that are lower than the % you predicted. If you add 10% to job costs of about $5.454M you come up with a price of about $6M. But when your accountant reviews the job he'll see that you earned $545.4K in profit on sales of $6M- only 9.09%.
 

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If I were to do building like you are describing I would lock 'em in a cost plus contract. That is the customer pays the costs of the subcontractors bills plus the costs of the subcontractors materials plus 10%, as an example, to you for you managing the job.

Ofcoarse you have to have a good idea of what the job is going to cost to make sure your mark up on the costs will cover your own costs and provide you with profit. Cost plus is probably the most fair method for both parties when it comes to these kinds of jobs... After all isn't that how most gusy estimate? They figure their costs then add some percentage for markup? The only difference is you are not locking yourslef in a lump sum and your profit may go up or down.
 
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