# Bidding Cost Plus



## llpcas (May 30, 2008)

For a 4500 sf addition, we want to bid it cost plus. Several items are still undecided and we think the project will probably undergo many changes.

Have you worked with a cost-plus contract and why did your customers decide to go with it? 

We like the openess and the protection of this type of contract, but will a homeowner be able to see advantages too?


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## swantucky (Jul 22, 2008)

We do alot of work this way, normally those tough jobs that are hard to put a solid number on or as you stated when there are unknowns. We generally call it cost not to exceed. We figure the job on the high side so there is normally some $$$ to give back. Most of the customers we bid this way to we have had a longstanding relationship with. The value to the customer is they get charged for what you do, not what you "might" have to do. To me it is a win-win, I would have done at my own home this way.


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## llpcas (May 30, 2008)

*Bidding cost plus*

thanks. this is very helpful. We are currently getting our bids together. How much over the cost we estimate from the current bids would you add to arrive at your "maximum cost"?
Also we are planning to ask for a fixed fee as the General. Do you think this is the best way to go?


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## swantucky (Jul 22, 2008)

llpcas said:


> thanks. this is very helpful. We are currently getting our bids together. How much over the cost we estimate from the current bids would you add to arrive at your "maximum cost"?
> Also we are planning to ask for a fixed fee as the General. Do you think this is the best way to go?


It would depend on how many variables you have as to what your maximum cost would be. A fixed fee for your management services based on your cost per day would be o.k. I can't type quick enough to be of much help, pm me and I'll send you my cell and we can talk.


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## Tscarborough (Feb 25, 2006)

Personally, I would never sign a cost + contract as an owner, and it would have to be pretty lucrative or long term for me to set one up as a bidder.


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## scottsanders250 (Jan 6, 2008)

Tscarborough said:


> Personally, I would never sign a cost + contract as an owner, and it would have to be pretty lucrative or long term for me to set one up as a bidder.


As a homeowner, would you sign a cost plus contract with a fixed fee? The fixed fee would of course be up to a certain maximum dollar amount with an additional percentage added to change orders outside of the original scope.

As a homeowner, I have the advantage of paying what it actually costs for the work, and as a contractor I have the advantage of getting paid for all of the work I do. Seems like a win win to me.


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## wireless (Nov 2, 2006)

What happens when the maximum price is reached?


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## finehomes (Feb 4, 2007)

I've been doing cost plus custom homes for 10 years. Never done it any other way and I NEVER will. Its fair to both parties. They ONLY pay for what actually gets put into the job and you get paid for what you do. They also see every single invoice....at least the way I do it they do.


Sam


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## swantucky (Jul 22, 2008)

wireless said:


> What happens when the maximum price is reached?


 The idea is to have your bases covered so this does not happen. A fairly detailed scope of work is needed. Generally with it being an open book job you can can juggle the budget with the customer. If they want better windows that figured maybe you could spend a little less on wood trim to offset that cost. There is alot of give and take.


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## Brock (Dec 16, 2007)

No. 

Customer wants to know the total price before they hire you. Plus you have to remember they are probably getting other estimates, and some or all of those wil lbe a fixed price. Think of it this way. You are walking out of a csino in LasVegas and you need a cab back to the hotel. There are two cabs waiting for customers at the front door. The blue cab has a fixed price of 10 bucks for a ride. The white cab uses a meter and starts the meter when you get in the cab. You have no idea what the meter will say when you get to your hotel. How many folks will get in the blue cab, and how manywill gamble and get in the white cab?

Now, I will say that I have offered a cost plus scenario to potential customers before but to this day (20 plus years in busines) no customer has ever accepted it. The problem is wages. The customer knows that all I have to do is fudge the manhours or price for manhours to get whatever profit I want. They get invoices for materials, but they have no earthly idea how many man hours were actually worked. 

EXCEPTION TO THE RULE;

If you are one those GC's that just rides around in your truck and never performs a single drop of physical labor then it might work. I have met a couple GC's like this and they sub every single aspect of the job out. 
A guy like that could get a customer to gamble with him. He would have to have millions of dollars of work going on at all times though to maKe any money. Imagine going through 6 months of hell building a new home for someone and all you get for your trouble is 15K. But, if you have 6 homes going at a time and all of them take 6 months to complete (very doable) then you pocket 90K for an average $150,000.00 home every 6 months, and all you have to do is eat donuts and talk on the phone.


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## Tscarborough (Feb 25, 2006)

If I as the Owner get to define costs, I am all over it. If the GC gets to define those costs, never in a million years. If the Plus is contract limited, and is reasonable, I might sign as Owner, but I would never offer as bidder. So it boils down to who writes the contract.


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## JumboJack (Aug 14, 2007)

I have found one way for it to work for both GC and HO is when there are unkowns involved.Like repairing termite/water damage where you don't know the scope of the work to be done till it is opened up.


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## Tscarborough (Feb 25, 2006)

Sure that is the only practical way for that to work. For a 4500 SqFt addition, though, it is another kettle of fish.


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## JumboJack (Aug 14, 2007)

Tscarborough said:


> Sure that is the only practical way for that to work. For a 4500 SqFt addition, though, it is another kettle of fish.


I totaly agree.


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## scottsanders250 (Jan 6, 2008)

I guess I should have clarified what else I think needs to be included in a cost plus situtaion. 

1. A relationship. Cost plus will not work if the H/O thinks they are going to get screwed. Basically this means working with the archie and H/O from the beginning and not in a competitive bid situation.

2. Understanding. If there are no final specs, there is no set price. On a 4,500 SF addition I would hope that there would be some kind of detailed specs if it is being put out to bid, but according to the OP, it sounds like the H/O

3. A capable contractor. Find a client, sell a relationship, get a design services/consulting contract, get an approved scope of work, put together the numbers to come up with a GMP, present to H/O with a separate cost plus contract.



Tscarborough said:


> If I as the Owner get to define costs, I am all over it. If the GC gets to define those costs, never in a million years.


The costs are material, labor, and expenses directly related to the project. Those expenses are explained and discussed with the H/O. I agree that some contractors can still screw the H/O here, but that doesn't mean that there is not a time and place for both cost plus and fixed bids.


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## Tscarborough (Feb 25, 2006)

If there are detailed specifications and plans, why would there need to be a cost plus contract? There is specific language in most remod contracts (I have only seen commercial, not resi), that handles unforeseen conditions.

Again, what is the compelling reason for an owner to accept a cost plus project? I can detail the reasons why I would want one as a contractor, but none as an owner.


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## Snow Man (Aug 18, 2008)

llpcas said:


> For a 4500 sf addition, we want to bid it cost plus. Several items are still undecided and we think the project will probably undergo many changes.
> 
> Have you worked with a cost-plus contract and why did your customers decide to go with it?
> 
> We like the openess and the protection of this type of contract, but will a homeowner be able to see advantages too?


 
iT'S JUST A NICE WAY TO SAY '' TIME & MATERIAL'' ISNT IT?:whistling


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## G&S23 (Aug 23, 2008)

It never ceases to amaze me how some of the catch words have become standard practice in our industry. A cost (fee) based contract typically is based on some bottom line value and you move forward defining what is included with your starting number. T&M is without a doubt the best bang for the buck as long as the work involved is not part of the contracted work. 

As for the addition the OP spoke of, the customer needs to know how much they're in for which in turn gives you the contractor fee. With no mention of drawings for the addition it would seem that the customer is looking for budget numbers which is critical to get this right. Anyone can give out a number with no accountabilty, but HOLD to it is another animal. Seen it over and over, the GC/CM give bad numbers upfront and, at the end when the project ran way over, there's nothing but extremely p****d off people left holding the bag. Worse thing yet, they (customer) could have the most beautifully crafted structure possible and you (contractor) will NEVER get any credit for the work...


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## d-rez (May 16, 2007)

I have yet to enter a Cost Plus contract, but the arch I do a bit of work for has suggested it to me. The arch showed my a budget worksheet from a past job he managed and he charged 20%. I charge 37% on top of direct costs, but I think HOs would flip if I tried to do a Cost Plus at that. For all of you who work Cost Post; how are your clients reactions when they see what % you are asking for? -Chris


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## Bob Kovacs (May 4, 2005)

d-rez said:


> I have yet to enter a Cost Plus contract, but the arch I do a bit of work for has suggested it to me. The arch showed my a budget worksheet from a past job he managed and he charged 20%. I charge 37% on top of direct costs, but I think HOs would flip if I tried to do a Cost Plus at that. For all of you who work Cost Post; how are your clients reactions when they see what % you are asking for? -Chris


You wouldn't show a 37% markup- you'd apply some of that cost as part of the "cost of work". For example, if your 37% includes burden on labor costs, you'd incorporate that $$ into the labor costs and use the higher rates. If it includes your salary for time you spend supervising the job, you'd include your time as "job supervision". If it includes the cost for insurance, you'd itemize the insurance separately. I can't imagine that you need a 37% markup to cover only non-job-specific overhead and profit- once you get the job-specific costs applied as "cost of work" your "plus" percentage will be much lower.


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## djbuilder (Aug 23, 2008)

*It goes both ways*

I find it difficult to bid a fixed price unless there are fixed specs; homeowners, or project owners, are notorious for wanting to build "it" but "it" seems to be constantly evolving as they work through their wants vs. money thing. A fixed price can turn into a bait and switch game without some rigid specifications. My real gripe is working with them for hours to develop their specs, and then they take the specs and price them with someone else and try to invoke the " whatever happened to free estimates" clause. How do you make owners aware of the value of helping them work through their decision process and then get them to compensate you for that part of their project? Architects don't seem to have any problem billing for time spent on Q & A but the builders expertise isn't paid for unless they start moving dirt. And yeah, they freak out when they do the math and look at your fee like it's some sort of windfall. I'm in Middle Tennessee and anything over 15 or 20% is considered extraordinary.


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## DBBII (Aug 28, 2008)

The American Institute of Architects has two "standard" contract forms that address cost-plus work. A-111 and A-114. They both do a pretty good job of defining cost. Keep in mind this requires a HUGE amount of paperwork. For example, if we need to run down to the local Home Depot for $20 worth of "stuff" to keep the job moving, we need to not only have a copy of the receipt from HD, but depending on what's in the contract, we get paid for mileage for the guy to drive to HD plus his time. 

Depending on your relationship with the Owner, the contracts above allow them to come in and audit your books.


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## G&S23 (Aug 23, 2008)

DBBII said:


> The American Institute of Architects has two "standard" contract forms that address cost-plus work. A-111 and A-114. They both do a pretty good job of defining cost. Keep in mind this requires a HUGE amount of paperwork. For example, if we need to run down to the local Home Depot for $20 worth of "stuff" to keep the job moving, we need to not only have a copy of the receipt from HD, but depending on what's in the contract, we get paid for mileage for the guy to drive to HD plus his time.


Once your customer finds out that they have paid more to pick up the items than they're worth, it won't be long till they (customer) will find someone who can make less trips to the local HD. All materials/supplies should be delivered to the job. This not only builds a relationship with local people but in turn may get you some work someday- this will NEVER happen from HD or Menards. Typically, my employees leave to go to lunch or die. 



DBBII said:


> Depending on your relationship with the Owner, the contracts above allow them to come in and audit your books


Generally 80% of my sales are private work with 1/2 of that being cost+. An audit is exactly what is to be expected, so if you have nothing to hide, the audit is a snap. Not your quote here DB, but some of these markup % that have been bounced around on this thread are totally unreachable, if not border line insane. If you're billing out $100,000 of billable cost, some here are saying they can get anywhere from $20,000 to $37,000 in markup, seems a little difficult to believe. 

When cost+ work is initated there is NO way that you can loose, so why do contract work anymore and make less for your exposure?


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## monticellohomes (Mar 19, 2008)

On custom homes I only do cost+. I do pass along other costs associated with that job like insurance, supervision, administrative to help me with my overhead and to lower the percentage. And to help ease the HO minds I cap my % off of the original bid/budget. The lowest it can be is 10% of the budget and the most it can be is 12% of that budget...with change orders being applicable to extra charges. Then the HO knows Im not just showing them a low bid to get the job...or if I am I'll do a lot of work for free.


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## orson (Nov 23, 2007)

djbuilder said:


> I find it difficult to bid a fixed price unless there are fixed specs; homeowners, or project owners, are notorious for wanting to build "it" but "it" seems to be constantly evolving as they work through their wants vs. money thing. A fixed price can turn into a bait and switch game without some rigid specifications. My real gripe is working with them for hours to develop their specs, and then they take the specs and price them with someone else and try to invoke the " whatever happened to free estimates" clause. How do you make owners aware of the value of helping them work through their decision process and then get them to compensate you for that part of their project? Architects don't seem to have any problem billing for time spent on Q & A but the builders expertise isn't paid for unless they start moving dirt. And yeah, they freak out when they do the math and look at your fee like it's some sort of windfall. I'm in Middle Tennessee and anything over 15 or 20% is considered extraordinary.


I've been struggling with this on remodel jobs. As per rbsremodeling suggestions I am now working up a loose estimate based on the initial measurements and consultation and then trying to get them to sign a design contract to take me up to the permitting stage. 

During the design phase specific selections and therefore costs will be nailed down. If they decide they want to bail and go with another contractor I don't lose money on the design.


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## thom (Nov 3, 2006)

There are several other things you can break out.

Charge tool rental for power tools. Charge for all deliveries. That 20% markup covers only things that are not directly job related. 

I've done some where we take labor at a specified rate (that already includes a markup) materials at list price then add the 20%.

Though I never liked t&m work, some jobs require it. When bidding commercial remodel it is not unusual for the customer to insist on t&m for all changes. You've got to include the specifics of that t&m in the initial bid.


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## SethHoldren (Feb 13, 2008)

"Cost Plus" vs. "Fixed Price....Choose Your Headache

It all boils down to which headache you'd rather have:

1*. Dealing with a customer who is freaking out about how much the project is adding up to, and it's not even finished yet.
* 
-OR-

2.* Dealing with internal cost overruns threatening to eliminate your profit.*


With *Cost Plus*, it all boils down to....



*Trust* (the client must trust you, and you must be trustworthy.)

-AND-



*Communication *(you must keep the client up-to-date on costs _very often, _and make sure they actually understand your explanations.)

With *Fixed Price *it boils down to....



*Accurate estimating*

-AND-



*Cost control*

With Cost Plus, the client is going to be concerned that you, your crew, and your subs won't be in a hurry to get things done.

With Fixed Price, the client will be concerned you are building a huge "contingency fee" into the price.

So, choose your headache. That's pretty much the deal.

I know there are some very reputable and trustworthy authorities who recommend Fixed Price for remodelers (think "advantage".)

But the truth is running a company using fixed price takes a high overhead situation. You must have a _very_ sharp team in your office, and in the field. And it's heavy on internal paper work.

Also, Fixed Price takes way more time on the front end doing the estimate. And you must build that cost into the price.

So, since it takes extremely high overhead to do Fixed Price correctly (so that you won't go out of business) I think Cost Plus can be appropriate, especially for the smaller guys.

But that's for remodeling. New home construction can be done more easily using Fixed Price.

Fixed Price takes a highly accurate and efficient production environment. And that is tough to create in the world of construction.

It can be like *trying to set up a scientific laboratory outside on a muddy dirt road in the middle of a rainstorm.*


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## G&S23 (Aug 23, 2008)

There's been a lot commentary on the "extra" paperwork involved with cost+ vs. contract work, but I respectfully submit why is this the case? Any invoice, charge, labor or clerical cost are charged to a job as part of your job costing entries. For example, when you get a bill for a dumpster doesn't that direct cost get charged to the job it was placed at regardless of contract or cost plus? Part of good/successful bookeeping is putting bills to which job they belong. Time cards are sometimes the bug-a-boo but if you have timesheets made like your computer entry window or your ledger things usually go pretty smooth- trust me on this one.

My insurance and bonding companies do an accountant review every year to see the health of company revenue/claims AND to evaluate if they will keep me onboard for the next year. If the books are a mess,then (not necessarily justified) your insurance company might just give you a rate that reflects your work in the office and not of that out in the field.


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## SethHoldren (Feb 13, 2008)

It's the extra internal cost control reports and estimating that are the big ones in my experience.

Simply reporting what costs have accrued...compared to spending a ton of time and effort "CYA" so you don't go over budget.

Your labor material and sub costs may be higher with cost plus since you don't spend all your time and resources checking and double checking. But with fixed price you have to do a lot more work (read: spend more $) making sure your estimates are accurate during the entire project.

It's a "six of one, half a dozen of the other" situation.


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