Cost-Plus Contracts Advice

[WendyC]

I am a small general contractor in New Jersey and I was just verbally awarded my first Cost-Plus type construction contract for a residential remodel. Typically my background was lump sum commercial contracts. Any advice on what I should include in the contract language? Tips on when/how to bill for my percentage? Any other things I may need to know?

[Happy Home]

Look over everything AIA .org has on the subject. They have templates for what you are asking.

Such as and so on.....https://www.aiacontracts.org/all-documents

[newhavenpaving]

Look over everything AIA .org has on the subject. They have templates for what you are asking.

Such as and so on.....https://www.aiacontracts.org/all-documents

Thanks for the input! Newbie here. It also benefitted me so thank you.

[Mark G]

One of my gurus is Michael Stone of "Mar-up and Profit". I agree with his view of cost-plus: don't do it. His explanation is here: https://www.markupandprofit.com/arti...rial-contracts

[EJust70]

I've been an Owner Representative on many projects. I've used Cost-Plus contracts and they can be good and bad. From the contractor point of view, you need to have all systems in place to be successful - timeclocks for labor, invoice tracking, scope documentation, cost reporting, progress measurement systems, etc. to help you justify all costs. It works well if you have a savvy owner you're working for who knows he'll make changes during the project and doesn't want to get killed on change orders, but understands you need to make a profit. If the owner is a "jag" (just-a-guy), he's probably hoping to get the work done cheaper than a firm price with change orders and will be upset when it doesn't turn out that way.

[johnny watt]

T&M contracts are the greatest thing since sliced bread. I have seen a number of contractors switch to them, and by putting an end to their incorporated socialism, ended up with more happy customers and able to finally pay their bills.

I am not talking about real companies, I am talking about the typical guy with a pick-up truck and a couple employees. These guys are good at what they do, as far as work goes, but not good at the business side, estimating, cash-flow etc. Without T&M they would be out of business and a fixed cost guy would scoop them up as employees and charge more for them to the same customers. Either that, or they would leave the business altogether and do something else. Or nothing else, for the older guys.

But in my area we don't have lawsuit problems like in the bigger cities, and the judges here are not as liberal as they are in the big cities. And you can't get blood from a stone.

[dgbldr]

Guys, this is a year old thread and OP Wendy never came back. Perhaps boyfriend Bob the Builder elucidated the issue for her.

[Allan Edwards]

Guys, this is a year old thread.

So what????

[jud aley]

To me Cost Plus is one type of contract best used when you are subbing out everything, it’s a very large job like a new house and you the GC are not providing any of your own labor.

T&M is used when you are providing your own labor, your own employees and can work on all types and sizes of jobs.
If you are providing your own labor its too difficult to define exactly what your “True labor costs” are, owners and architects will argue all day what’s a cost and what “should” be covered by your overhead markup. With either type of contract, I have never seen a markup of more than 20% in Residential and often much less in commercial.

If you are marking up your burdened labor only 20% you are headed down the road to Bankruptcy, believe me, I know, I learned this 25 years ago.

With T&M you set your labor rates high enough to cover your true costs and a bit more for profit.

Example- you pay your carpenter $30.00 per hour on payroll, you can document many real burdened costs, Works comp, liability, vacation pay, Education and training, etc., typically for me this is another 35-50%. So you now know the Carpenter is going to cost you $30 x 50% = $45 per hour just o put him on the job for one hour

I will take that burdened cost and add $20 per hour to it and put $65.00 in my rate table in our T&M contract. I also have in my T&M contract that all labor, material and subs run thru my books are marked up 20% (15% for overhead and 5% profit) so my actual hourly rate to the client is $65 x 20% = $78 per hour + plus the 20% I make on subs and material.

And we do have all the systems in place, time clocks for labor, detailed time sheets the carpenters fill out. We invoice every week, Do a weekly job cost vs. budget report for me to see, scope documentation, etc.

In the invoice the client sees who was working on what day and for how many hours, a brief description of the work that was done, copies of all sub and material invoices. Its completely transparent.

There has to be a high level of trust between client and contractor and I typically establish this during the pre-construction process which I also typically charge for.

As EJust70 said this works for clients who are OK with you making a profit, if its someone looking for the cheapest price it wont work.
You also have to be willing to fix your mistakes at no charge to the client, during the construction or two years later.
While I don’t make a killing working this way I have made a good living and I find it to be less stressful for owner and me than the occasional fixed price job we do where the owner has no idea what actually goes into a project.