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Old 02-09-2011, 03:58 PM   #1
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Cost Plus Contract


Recently did a renovation of a 1900 Sq Ft. Condo in a high-rise building.
Agreement with Contractor was his Costs PLUS 12.5%. Job estimated 4 months - it was a TOTAL GUT - all walls, floors, plumbing, electric, etc. - everything.
9 months later he's pretty much finished. I estimated the time to completion would be about double what he initially proposed - par for the course here. I also figured on the final cost being about 50% higher than the Proposal. It comes in about 100% higher. Final cost comes to about $100/sq ft. It looks GREAT - BUT -
I now received the Final Bill, and I am surprised.

The first issue that concerns me is the "Cost" on which the COntractor then adds his %. The Contractor himself billed for for His own Labor, as well as his own Supervising time! His labor was pretty close to the amount of time billed by the general laborer, and then on top of that the bill for supervising time was for even more hours, and at a higher rate, than the Labor.

During the job, I kept paying draws, and when I saw all the "Supervision Time" I assumed that would be a part of the "PLUS" that the COntractor would receive at the end of the job.

But no - he is charging me supervision time, labor time, and then adding 12.5 % of the time charged for his labor & his supervision (as well as time his office manager spent).

Among the Costs, of course, are LABOR. I have no problem with any of the invoices from the skilled tradesmen such as plumbers, electricians, tile, etc.
But the General Laboror presents a few problems.
One - there is no breakdown of how much time was spent on what, other than a broad statement such as "Framing, $6000." The invoices have the dates on which the work was done, and some invoices account for a work week of well in excess of 40 hrs. Our bldg has rules restricting work from 9 - 5 on weekdays. But 2 Laborers supposedly did some work at home & then brought it with them to the COndo. So how am I supposed to have any idea if the # of hours are correct - no time sheets, etc. were kept. In one instance I am sure too much time was billed - 30 hours were billed for one week for building a few shelves & installing into a small closet. But how do I know?

Other work was nebulous. I know that this person had to redo several things that were done wrong initially. I don't think I should pay for the Redo. Again, how do I know?


I really do not want to fight with the COntractor over these practices unless I am completely sure they are wrong. We've become pretty close during the course of the work, and I hope to maintain a friendly relationship with him & his family. But it really seems to me that at a minimum, I am being double or even triple billed here.

Any comments, please?

Thank you.

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Old 02-09-2011, 04:59 PM   #2
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Cost Plus Contract


You need an attorney, not a DIY site. A half hour with an attorney would answer all your questions. Of course I'd talk to the builder first and make sure he meant to do what he's doing.

Cost-plus is rarely a good way to go...Seen a lot of folks get really hurt that way.

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Old 02-09-2011, 05:32 PM   #3
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Cost plus is fine if you know what you are getting into.

If he is charging his labour with a markup, and then adding the 12.5% on top of that, then it may be arguable, depending on what your contract says...
Is "cost" defined in your contract?

Is what the "plus" applies to defined clearly in the contract?
What are the reasons for the cost overruns? I assume you changed and added things as you progressed and this increased the cost, or did he just do a really bad job in estimating? It is not unccommon in a cost-plus contract to state that the price of the original scope shall not exceed $xxxxx dollars, of course with exceptions.

If the increases were based on your decisions, unkown conditions, and the famous "since you're here" requests then it wouldn't matter what type of contract you had, there would have been change orders every time and additional costs.

The advice on speaking with an attorney is a good one if you are serious. One familiar with construction and contract law.

Generally, in Cost-plus the contractor should be open with you, and in my opinion you should be able to see time-sheets and invoices. You say there are no time sheets, but he must have some sort of record of time since he has to pay his employees. My employees have to fill out their weekly timesheet at the end of the day: start time finish time, and a description of what they did that day. They hand those in so that they can get paid. When I'm doing cost-plus work the client can see these timesheets whenever they want.

In the past, I once worked for a GC who had the timesheets in a binder at the client's home and the employees and subs both signed in and signed out, even if going for lunch. Just so the client had a record of everybody that was coming and going in their home. Now that is detail! I don't think you need to go that far, but I can respect the people that do.

Back to the point,
I think that it's highly likely most of the extra costs were based on your own decisions or unknown existing conditions and now you have sticker shock, but I also feel in cost-plus the contractor should be fairly open-book to the client.

Last edited by fungku; 02-09-2011 at 06:27 PM.
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Old 02-09-2011, 05:50 PM   #4
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Cost Plus Contract


I'm not questioning most of the additional costs. Many changes were made, both by us, and by unanticipated events. And some of the estimates were way off - but he disclosed those to us as they were happening.
The costs I AM questioning are whether it is proper to charge his markup on top of his own time already charged for Labor; whether he should be charging by the hour for SUpervision on top of the charges for his Labor and on top of the 12.5% P&O, and whether that 12.5% should be added to the hourly supervision costs; and how I am supposed to evaluate the Labor from the General Laborer he used when the guy's bills are not very descriptive of the work he did.

The LAST thing I want to do is get into any sort of litigation. I want to do what is right & fair for both of us. But at the same time, I do not want to be cheated, if that is what might be happening here.
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Old 02-09-2011, 06:13 PM   #5
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Cost Plus Contract


Quote:
Originally Posted by coachgns View Post
I'm not questioning most of the additional costs. Many changes were made, both by us, and by unanticipated events. And some of the estimates were way off - but he disclosed those to us as they were happening.
The costs I AM questioning are whether it is proper to charge his markup on top of his own time already charged for Labor; whether he should be charging by the hour for SUpervision on top of the charges for his Labor and on top of the 12.5% P&O, and whether that 12.5% should be added to the hourly supervision costs; and how I am supposed to evaluate the Labor from the General Laborer he used when the guy's bills are not very descriptive of the work he did.

The LAST thing I want to do is get into any sort of litigation. I want to do what is right & fair for both of us. But at the same time, I do not want to be cheated, if that is what might be happening here.
Those charges should all be defined in the contract.
If it's defined in the contract and that is how he breaks it out to meet his OH&P, then that's how it is. If it's not defined in the contract then you could attempt negotiations but it could turn into a litigious situation.

Reread your contract and if you still have issues, consider that maybe you should let him know you don't want to cause trouble but you have concerns regarding the general labor time, supervision time, and the 12.5% being charged on top of that.

As far as knowing the time, I really think that he should disclose that to you, as I mentioned in my post above.

Last edited by fungku; 02-09-2011 at 06:19 PM.
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Old 02-09-2011, 06:19 PM   #6
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Cost Plus Contract


I like your idea about the time sheets in the home - I'll know next time.
The COntractor had no employees. All the people who did the work are SUbs - including general laborers. So they merely submitted summary bills - e.g. "9/1/2010 - 9/15/2010, $3000."

I suppose I could at least ASK for a more detailed breakdown.

But I think more important for me is the time charged by the contractor, both for labor & supervision (at the same time), and then the 12.5% added to that.
That's where I'm really not sure what to do.
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Old 02-09-2011, 06:35 PM   #7
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Quote:
Originally Posted by coachgns View Post
I like your idea about the time sheets in the home - I'll know next time.
It should be part of the initial agreement. Don't make a big issue out of it though, if you do request something like that in the future. There will always be an employee here or there that will forget to sign something, or a sub who forgot to sign out, etc...
Also, be careful how you approach it too. You might scare people away from your job thinking you're a micro-managing control-freak

Quote:
The COntractor had no employees. All the people who did the work are SUbs - including general laborers. So they merely submitted summary bills - e.g. "9/1/2010 - 9/15/2010, $3000."
That's a different situation then... without an agreement beforehand...

Quote:
I suppose I could at least ASK for a more detailed breakdown.
Stay friendly and non-confrontational and let him know you have concerns. As a professional, he should not over-react and probably has had to explain himself before. it's not fun or comfortable, but that's life, and that's business.

Quote:
But I think more important for me is the time charged by the contractor, both for labor & supervision (at the same time), and then the 12.5% added to that.
So a single person was billed out for doing two jobs simultaneously? That is odd.

Adding % on top of it really does depend all on your agreement. Last I checked there was no universal standard on this.

Last edited by fungku; 02-09-2011 at 06:54 PM.
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Old 02-09-2011, 10:54 PM   #8
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Cost Plus Contract


I'm going to try to help shed some light even though it's impossible to answer your question without specifics.

Every for-profit business in the world tries to make a net profit above and beyond all costs including overhead, or "the cost of doing business" costs.

So the short answer is yes.... a cost plus job would have a markup on all the costs, including all labor (whether swinging a hammer or oversight). The standard target net profit margin in the construction industry, according to NAICS data, is 10%(the average achieved net profit is usually around 7% due to cost overruns). You would use a mark-up ofy aproximately 12% if you were shooting for a 10% net profit.

If the contractor is only marking up costs for net profit, which seems to be the case, then he must be covering his overhead within his hourly labor charges.

That means his hourly rate would reflect the hourly wage he is paying out(or paying himself), plus labor burden(costs such as benefits, health insurance, workman's comp insurance or disability insurance, etc.) On top of that he would need to raise the hourly rate additionally to cover things like his vehicle, fuel, accounting fees, liability insurance and office supplies as well as many others.

You will find as many different ways of structuring overhead and accounting for costs as you will find construction companies. One company will roll all their dumpster fees into company overhead while another will assign trash fees to the direct costs of each job. Therefore it is rather difficult to make any kind of comparison.

Do not underestimate the amount of time a contractor spends off site and on site supervising a job.

If you are suspicious that the charges are unfair I would suggest step 1 should be a candid conversation with the contractor about his fees.

Nothing that you stated so far would seem to indicate anything fraudulent, just an unfortunately typical scenario in this industry of poor communication and initial contracts or agreements lacking in specificity or being poorly explained.

Good Luck and let us know how this develops.
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Old 02-10-2011, 05:07 AM   #9
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well said, sir
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Old 02-10-2011, 11:30 AM   #10
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Cost Plus Contract


Everything that needs to be said has been said above.

I do want to quote orson above because he is right on target..........

"Do not underestimate the amount of time a contractor spends off site and on site supervising a job"

"If you are suspicious that the charges are unfair I would suggest step 1 should be a candid conversation with the contractor about his fees"

"unfortunately typical scenario in this industry of poor communication and initial contracts or agreements lacking in specificity or being poorly explained."

I've never had a problem with my pricing ever. My clients know exactly what costs are and why. My #1 job is to maintain open communication about costs which eliminates any client anxiety and keeps them sleeping well at night.

coachgns you appear to be reasonable, very reasonable, and have every right to question your contractor about anything that concerns you. I have no doubt your contractor knows you are a reasonable person as well.

As a contractor myself, if my clients are unclear about any aspect of a project, from costs to the color of the switch plates it's my fault for not being clear enough and detailed enough. Somewhere along the way I dropped the ball.

The contractor is the expert, it's his show, his agreement you are signing, he authored it so he better have all his t's crossed and i's dotted.

Approach him with your concerns and if he is half as reasonable as you I'm sure he will be forth coming with all his numbers and satisfy you fully.

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