Brad asks: On remodels, are supervision costs typically included in contractor’s percentage fee or are these billable?
Steve Bliss, of BuildingAdvisor.com, responds: There is no definitive answer to your question as different contractors handle this issue differently. Some bill for all supervisory time, some bill for only specific types of supervisory time, and some bill for none and cover it under overhead.
The critical thing is that the contract clearly spells out which costs are reimbursable – and which are not. In my experience, the most common approach is for contractors to bill for time they spend on the job site, whether swinging a hammer or supervising, but not for time spent in their office or elsewhere. This time is usually paid for as overhead.
The logic is that if the contractor were not on the job site doing supervision, then he would be paying a job super, project manager, or lead carpenter to provide supervision and would be billing for their time. Small contractors who spend time on the job doing supervision while also swinging a hammer certainly charge for their time on the site at whatever rate they bill their own time. They may charge a different rate for carpentry work vs. management time, whether spent on or off the job site.
The question gets a little more murky with time spent off-site doing necessary job functions like tweaking plans, meeting with suppliers, or attending meetings with the owner. Some contractors distinguish between regular meetings and discretionary meetings called by the owner to, for example, revise the plans.
While some contractors try to charge hourly for some of these off-site management tasks, this is not a popular concept with customers, who may view this as “double dipping”. That is, it looks like the contractor is getting paid for this twice – once in the markup and again as a billable hourly charge.
Whatever approach is taken, it should be spelled out clearly in the contract. For example, the Contractor’s Legal Kit, created by my colleague Gary Ransone (www.constructionlawhelpline.com ) includes a cost-plus contract that says the contractor can bill for “Contractor’s or Contractor’s supervisory personnel performing off-site coordination activities or off-site job-related meetings directly related to the progress of the work…not to exceed __ hours per week.”
The widely used AIA contract which tends to be more owner-oriented, says that “expenses of the Contractor’s principle office other than the site office” are not reimbursable, but the contractor can bill for “costs necessarily incurred by the Contractor in the proper performance of the work”. Since this leaves a lot of wiggle room as to what are considered billable charges, this needs clarification when the bid is submitted to avoid disputes later.
My personal feeling – as both an owner and former contractor – is that clients would rather pay a higher markup or management fee than get billed for off-site management hours. In cases where all or some of the contractor’s management time is billed as a separate line item, it should be treated as a special category and not marked up like regular trades labor. The contractor should simply charge a reasonable supervisory rate that covers his time and costs. If he also spends time on the job swinging a hammer, however, it is reasonable to mark up that labor like any other carpenter’s.
Markup (for overhead and profit) on cost-plus contracts typically ranges from 10% to 25%, depending on the size and complexity of the job. Remodeling markup is generally higher than in new construction as remodeling is often more complicated and takes more management time.
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Should We Pay Surprise Costs For GC’s Time?
Hi there – I am a homeowner who hired a GC on a cost-plus basis of 20%. According to the verbal agreement and what was outlined in the contact, there was no mention of the owner billing us for his time in addition to his 20%. We were surprised by the number of hours he claimed (way more than would be possible onsite) and were not happy about this not being disclosed. Is it reasonable to ask for his log of hours and come to an agreement on what should be billable and what is not? The GC and his office manager were very offended that I asked any questions. I really like the guy – but don’t feel that it’s fair that we are surprised at a cost that was not communicated/disclosed and he is marking up this time, as well. Can he do this? Any advise would be greatly appreciated.
Billing for a contractor’s management or supervision time is a common source of disputes on cost-plus contracts. The “plus” part of cost-plus is for overhead and profit. Overhead is generally assumed to include the general costs of running a business, including office expenses. Overhead does not generally include costs associated with a specific job. In order to stay in business, the contractor has to get paid for his time, either as part of the markup or as billable hours.
The problem is that “overhead” is a gray area. What some contractors consider overhead, others consider a direct job cost. For example, time estimating the job, ordering materials, meeting with clients, and handling paperwork could be considered either an overhead cost or a direct job cost. It is not unreasonable for a contractor to charge for some of this management time as a direct cost, but it is unreasonable to expect that a customer would know this ahead of time.
In a fixed-price contract, all the customer usually sees is the final cost, so it doesn’t really matter how the contractor approaches the issue. It’s part of his internal accounting system. In a cost-plus contract, however, it is central to how the billing will work. To avoid conflicts with clients, it is critical that this is made clear to the client early in the process – ideally at the time of the cost-plus bid.
There are many different approaches to billing for management time, so it is wrong to assume that the client knows what to expect. Some contractors charge a fixed fee for job management. Some charge for their hours spent on job-specific tasks, but do not add markup. Some get paid for their time out of overhead. Since most clients are not experts in cost-plus billing procedures, it is the contractor’s responsibility to clarify this. A contractor who fails to discuss this with the client ahead of time is asking for trouble. No one likes billing surprises.
So it is definitely not unreasonable for you to question the bill. While it may be uncomfortable for you raise the issue, it was contractor’s responsibility to make his billing procedures clear at the start of the job.
Cost-plus is intended as an “open-book” billing method. The client generally has the right to see all invoices for materials and subcontractors, in addition to a detailed accounting of labor hours. While sharing all this information is common on commercial and government work, it is less common on residential jobs, unless there are billing questions. On residential work, there is a large element of trust. It feels more personal, but business is business. You have the right to know how the bill was generated.
It sounds like the contractor (and office manager) feel offended that you do not trust their billing methods. Perhaps they feel like you are accusing them of padding the bill.
I would try to defuse the situation by making it clear that you like the guy and like the work, and that you trust that his billing is honest and responsible. Emphasize that you are just trying to get a better handle on the billing procedures. Be clear that you were surprised by the substantial charges for management time and just want a clearer picture of everything that goes into managing the job. Play dumb – like detective Columbo (if you ever watched the show). I would also question if they are adding markup to supervision time, and if they think this is fair.
You may find that the contractor is open to a compromise on the bill. If not, you are left with the choice of whether to dispute the charges and withhold money from the final payment. These are difficult conversations to have, but it’s important for the contractor to hear that his charge for management time was an unpleasant surprise to you. Maybe this will prompt him to do a better job of communicating with clients on future jobs.
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