View all BIDDING articles Also 10 Reasons to Avoid Cost Plus
Cost-plus, or time-and-materials, contracts are often used on jobs with a lot of unknowns and hidden conditions, such as repair work. While generally used for smaller jobs, these contracts are sometimes used for large jobs as well — even new homes. Whenever the plans and specs are fuzzy for whatever reason (never a good idea), cost-plus may be the only way to proceed.
On jobs with many unknowns, the client can benefit from cost-plus pricing, in theory, because the contractor does not have to add big “fudge factors” into his fixed bid to cover the unknowns. The homeowner pays only for the actual work completed. Without adequate protections built into the bid, however, the owner is taking on an enormous risk that job costs will spiral out of control. There is little incentive for the contractor to get the job done quickly and cheaply.
In general, cost-plus work is an open book process where the contractor should provide itemized bills to the client that include documentation of all hard costs. This would include invoices for materials and subcontractors, as well as work hours and billing rates for direct labor supplied by the contractor. This is a trust-but-verify process to ensure that the contractor is keeping good records and billing responsibly. In practice, however, invoices from vendors and subs are often not provided unless requested by the client.
The two main variations of this approach to bidding are cost-plus-a-percentage and cost-plus-a-fixed-fee.
Cost-plus-a-percentage. In this scenario, the contractor bills the client for his direct costs for labor, materials, and subs, plus a percentage to cover his overhead and profit. The problem with this approach is that the contractor has no real incentive to complete the job quickly or cheaply – the longer he takes and more he spends, the larger his profit — not necessarily a good deal for the owner.
Cost-plus-a-fixed-fee. In this scenario, the contractor bills the client for direct costs, plus a fixed fee for overhead and profit. In this case, the contractor is motivated to complete the job quickly and cheaply, or his overhead and profit percentage keeps dropping. If the customer increases the scope of work through change orders or a changed scope of work, then the customer and contractor would need to renegotiate the fixed fee or follow a prescribed formula.
Estimates. Nearly all cost-plus work comes with an estimate of costs. The estimate should contain the scope of work, including detailed plans and material specifications, along with a breakdown of costs for that main phases of work. An exception would be an emergency repair, where there is no time for a detailed estimate, so a ballpark estimate will have to do. However, it should be made clear that all cost-plus “estimates,” are a best guess, not a fixed bid. The greater the unknowns, the less precise the estimate will be.
Guaranteed maximum. When clients are concerned that job costs will spiral out of control, some contractors will provide a guaranteed maximum price. In one version, the contractor will split the savings with the customer if the job comes in below the maximum. In this case the contractor has an added incentive to beat the maximum price (or the set the maximum price high enough that he can easily beat it).
A similar approach is to negotiate a flat fee with an incentive bonus if the job comes in on time and on budget. I’ve also seen cost-plus contracts where the owner has the right to terminate the contractor if the owner is over budget by a certain percentage at any draw by the contractor. The goal is to build in some protections and incentives to help protect the owner from a runaway budget.
Defining job costs. For this approach to work, it’s essential that the contractor make clear to the owner which costs will be considered direct job costs – and therefore reimbursable. The obvious costs are subcontractors, materials and supplies used on the job, such as lumber and nails, along with consumables such as plastic sheeting, bits, and blades used up on the job. For labor, the reimbursable rate typically includes “labor burden” of employee taxes, benefits, and insurance.
Incidental costs like dumpster fees, permit fees, and equipment rental are typically included. Other costs are subject to negotiation: rental/usage fees for equipment owned by the contractor, vehicle expenses, insurance costs. As an owner, I would expect these to be covered by the contractor’s overhead, but either way, it should be clear what you will be billed for as a job cost.
A related issue is the contractor’s time spent on job supervision. Generally, this is reimbursable if he is on the job site overseeing subs or his own crew (or swinging a hammer himself). Management time off-site is generally not reimbursable unless specific tasks are listed as billable, such as making owner-requested plan revisions.
Pros of cost-plus-a-percentage
- For jobs with a lot unknowns, contractor does not have to pad the price for uncertainty.
- Can get started quickly on jobs with many unknowns and incomplete plans.
- You pay only for work completed, with open books, at a known rate.
Cons of cost-plus-a-percentage
- Contractor has little incentive to keep costs down.
- Owner assumes all the risk of cost overruns
- Requires high level of trust in contractor
Pros of Cost-plus-a-fixed-fee
- Same advantages as Cost-plus-a-percentage”
- Contractor has a greater incentive to complete job on time and on budget.
Cons of cost-plus-a-fixed-fee
- Owner assumes most of the risk of cost overruns
Some people love cost-plus work; some hate it. In theory, it can save the owner money on jobs with a lot of unknowns, since the contractor does not have to pad his estimate to cover the unknown potential costs. In some cases, it probably does save money, but you will never know ahead of time – and you absorb most of the risk of cost overruns.
In some cases cost-plus is an easy fall-back for a contractor with limited experience in estimating, or who does not want to invest the time in producing a detailed estimate. This is dangerous as neither you nor the contractor has much idea of what the project will end up costing.
Also the contractor has little incentive to hold down costs — an ongoing battle on any job site. More often than not, cost-plus jobs end up costing the client more money, sometimes a lot more. Also, the client has little leverage at the end of the job when there may be disagreements over quality issues or the scope of work. What, exactly, was included in the original estimate? You can’t hold back the final check to get the work completed properly, since it’s never clear which check is final. You just keep paying and paying.
For these reason I recommend avoiding cost-plus contracts in most cases. They simply carry too many risks for the owner and few benefits. They often lead to cost overruns and disputes over money.
It’s better to nail down as many costs as possible before starting the job and get a fixed bid. If the plans are incomplete, slow down and get them completed. If there are hidden conditions, cut a hole in the wall to investigate further. For the few unknowns that remain, use reasonable allowances.
Where you must use cost-plus because you cannot get a fixed bid, or there are just too many unknowns, you can reduce your risk with these safeguards. It is best suited for small jobs where large cost overruns are unlikely. To protect yourself, I recommend the following:
- Start with a detailed scope of work, with detailed plans and specs, so both parties have a clear understanding of the work to be down.
- Get a detailed estimate — cost-plus is not an excuse to avoid estimating (although it is non-binding).
- Use a cost-plus-a-fixed-fee contract, not a percentage.
- Try to get a guaranteed maximum for peace of mind.
- Get a clear list of reimbursable costs, to avoid misunderstandings.
- Have the contractor provide detailed records of all reimbursable costs when billing. This should be an open-book approach.
- Only use a contractor with a sterling reputation and good references for similar jobs.
Read 10 Reasons to Avoid Cost-Plus Contracts.
Related Links: Are Supervision Costs Billable? Cost-Plus for New Homes? How Much Markup? Avoiding Cost Overruns
Should I Pay 100% of Markup At 50% Completion?
My builder just sent me a lump sum invoice for the 20% profit markup on a job that is 50% complete.
Shouldn’t his profits have been included in the bank construction loan draws? They did not estimate the job properly and the loan amount is inadequate to cover all costs. However, I see that as their problem, at this. point. I’ll pay the difference in cash at the end of the project assuming all is completed satisfactorily.
Between the loan and my cash down payment they have $417k for the project. (It’ll end up closer to $500k when it’s complete, including their 20% markup, and I have the cash to cover it. Meanwhile they have only documented $217,200 of expenses to date.
Six months into the work, my builder sent a letter stating they would start to invoice monthly for overages on materials, etc. that aren’t covered by the loan draws, so there wouldn’t be such a large balance due upon closing. I didn’t sign anything agreeing to this plan, but it seemed fair enough and I didn’t have a problem with it.
Now, several months later, they’ve sent me this bill that amounts to their 20% profit, not material overages. And it is not at all detailed. Not even an invoice number! Just “pay this amount in 10 days.”
MY QUESTION: Do they have an obligation to provide details on overages? Is it appropriate to pay this chunk of profit at this time – mid-project – vs.. the end of the job? If so, should it come from the bank loan vs.. my personal funds?
Please let me know your thoughts. It’s a LOT of money and the time frame is short for me to figure out what to do. Thank you for your help!
In general, cost-plus jobs are “open book.” Typically, when you are invoiced, you receive documentation of all billable costs and pay that amount plus the agreed-to markup for overhead and profit.
Typically the markup is included in each payment, but in contracts with a lump-sum markup, it may be billed in another fashion. Paying 100% of the markup when the job is half done is certainly not typical. Unless this was specified in a contract you signed, you certainly have a right to push back on this.
Billing can be monthly or according to milestones established in the draw schedule, whatever you agreed to. I prefer a draw schedule to ensure that work is completed before you pay for it. Monthly draws can go on indefinitely.
As for your specific questions:
Yes, the builder has an obligation to provide details on overages in the form of invoices from suppliers and subs. If the overages are for the building crew’s own labor, then it’s reasonable to ask for an explanation, but change orders are not used as they are in fixed-price contracts. Change orders are a better mechanism for tracking cost increases. There are many possible reasons for cost overruns – for example, the estimate may be low on labor or materials, material prices may have changed, or the owner may have made changes to the plan.
No, it is not appropriate to bill for all overhead and profit in the middle of the job.
In general, you want to bank to pay out the full loan amount before you start using your personal funds, aside from your down payment. Banks usually want you to have some “skin in the game” in the form of a down payment. Most construction loans include a contingency reserve of 5% to 10% for unanticipated expenses. If you exceed that amount, you’ll need to dip into you own cash.
Should I Pay Both Markup and Management Fee?
I have a signed contract with a “Cost-Plus Structure” where I agreed “to pay the cost of all materials, labor, and sub-contractor work used in the construction project PLUS the Contractor’s fee of 18% for overhead (11% approx.) and profit (7% approx.).” The contractor is adding their “Margin – Profit (18%)” to each invoice, calculated by dividing the total of the invoice by .82 (e.g. $100,000./.82= $121,951.21), the equivalent of about 21.95%. I am arguing that I should only have to pay the 18% Contractor Fee, not 21.95% Profit Margin. Who is right?
In addition, I have paid close to $10,000.00 for “Management fees” that were not listed in the estimate/scope of work and are over and above the labor charges I have paid. So far, I have paid another $10,000 more for labor than what was in the estimate. There were no hidden conditions that would account for the additional hours, so I am left wondering why the renovations are taking so much longer.
I have also been billed for materials that were obviously not used in my renovations. The contractor was quick to credit my account when asked about those charges, but I can only wonder if other materials have been charged to my account in “error”. Unfortunately, I couldn’t track all the types and quantities of the materials used for my renovations nor track all the labour hours so am left in a position of having to trust the honesty of the contractor. I am certain the vast majority contractors are honest and trustworthy just not sure if mine is? Honestly don’t know.
Most commonly, cost-plus contracts contain a mark-up figure, not a margin figure as you are paying. If the contact indicates an 18% markup, then I think the contractor is wrong to covert that to a margin calculation.
Also, management or supervisor fees are typically included in the markup percentage unless specifically listed in the contract. The contract should be clear about what costs are reimbursable. If the contractor is spending time on the worksite swinging a hammer, then that is certainly billable. Time spent in the office ordering materials or preparing bills is usually not billable. Time spent doing other management tasks, such as meeting with the client, can go either way, but should be made clear in the contract.
Being billed for materials that were not used on your job is either sloppy bookkeeping by the contractor or dishonesty – can’t say which. Although, as with the bank, mistakes are rarely in the customer’s favor.
As for cost overruns, there are many possible reasons. It’s very rare that building costs come in lower than the estimate and very common that you end up spending more than the original estimate. On a cost-plus job, the risk of cost overruns is borne almost entirely by the homeowner. The contractor has little incentive to keep costs down. That’s the biggest problem with cost-plus contracts.
Still, the contractor owes you an explanation for why the job costs have exceeded the estimate. The estimate may be not be legally binding, but it still supposed to represent a good-faith effort by the contractor to accurately predict the cost to complete the job. Sounds like you need to keep a very close eye on this job to prevent costs from spiraling out of control.
M Peterson says
Can Contractor Charge Fee After Final Payment?
If the contractor gives a cost plus contract that states the the total purchase price will be $xxx which inclides their fee and then proceeds to take out all of the purchase price in the draws but never includes any of their fee in the draws, are they still entitled to their fee?
On a cost-plus job, it is customary for the contractor to include any overhead and management fees in the individual draws. However, there are no laws or rules, other than the contract, governing how the draws are scheduled. So I would take a close look at what the written contract says.
If the contract states that the total purchase price is fixed at $xxx, then this is not a cost-plus contract. The number may be an estimate of the final cost or a not-to-exceed price. Otherwise it sounds like it is actually a fixed price contract.
In the typical cost-plus contract, there is no maximum price. In general, this is an open-book system in which the contractor shares his costs for materials, labor, and subs, adds on his agreed-to fee, and comes up with a final price.
If the contractor signed off with you or the lender or you , stating that the last draw was payment in full for the work, but now is asking for additional money, you may have a strong case that you have, in fact, paid in full under the terms of the contract. I would start by asking the contractor why this invoice for his fee is arriving now. It may simply be a result of sloppy bookkeeping — not a crime, just a bad business practice.
If his explanation does not sound completely legitimate, you may want to get the advice of a construction lawyer on the best way to proceed. Options include payment in full, partial payment, or disputing the charges altogether. This would depend, in part, on whether you are happy overall with the quality of the work and think you are paying a reasonable price.
Should I Have To Pay Overhead & Profit on Owner-Supplied Materials?
We have constructed/renovated three homes, all with different contractors under a “cost-plus” contract. The first one fronted all expenses, submitted receipts monthly and we paid those plus the contractor’s fixed percentage profit/overhead. In the second project, the contractor charged separate fixed percentages for profit and overhead, but the principle was the same. He also charged an hourly rate for actual hours he or his crew spent cleaning up, supervising subcontractors, etc., but did not charge profit or overhead on that expense. Also, there were several large expenses (we had to replace 3 HVAC units, for example) and he “allowed” to pay the HVAC company directly and did not charge us profit or overhead on the amount of that contract; the same was true for most of the bath fixtures and the like, which we or our interior designer paid for. The one time the contractor billed us for profit and overhead on an expense we paid directly, they backed it out on the next invoice as having been billed in error.
Now we are nearing the end of a third project. To this point, the billing has gone much the same as with other projects – we pay for the labor and materials purchased through the contractor and we pay a fixed percentage above that for his profit and overhead. The largest expenses we have paid directly – for example, $40K for appliances and a mind-boggling $85K for cabinets. He is already billing us for his crew’s labor to install the cabinets (which came as a surprise to us as we thought that would be done by the cabinet company, but we did not dispute since we subsequently learned that in our area, that’s how cabinets purchased from a cabinet company are done), but in the invoice we received today, the contractor has also added his profit and overhead percentage to the entire cabinet purchase. Between the cabinets (which we paid for in full when they were ordered 10 months ago), the labor for installation and the contractor’s profit and overhead, these cabinets will cost us $107K.
I’ll admit that our contract is not what I would like it to be in that it does not spell out that items paid for by the owner would not be subject to profit and overhead charges. I moved forward with it based on how my previous projects had worked. He has not billed us for any time at an hourly rate and, frankly, has been onsite very little. He has not small parts of the job himself (moving the lights in a bathroom, for example) and correcting the location of the kitchen island, which had been incorrectly located by the carpenter. And as expensive as they are, the cabinet order has been a mess to sort out and he has spent a lot of time with the cabinet company rep straightening that out. We don’t begrudge paying for actual labor as long as it is not to correct errors made by a subcontractor; however, profit and overhead charges on the contract price of the cabinets surprised us and as we consider the fact that appliances and most fixtures have not yet been installed, we are wondering whether he’ll tack on profit and overhead for that too.
I’m writing for your input to better understand whether we should have anticipated this. Despite our past experiences with cost-plus arrangements, is it the “norm” that the contractor should add profit and overhead onto the purchase price of cabinets (or any other big-ticket item) for which the owner has paid when we are already paying the contractor for labor to install and he will charge profit and overhead on that labor? I know you don’t like cost-plus contracts and even though they have worked for us in the past, we too are re=thinking them. Your input would be very helpful.
As you have discovered, there are many variations of cost-plus contracts. As with any contract, the devil is in the details and there are many details in how these contracts are structured.
The more the details are spelled out in the contract the better, but it is difficult to cover every contingency in any contracts. In my experience, however, cost-plus contracts have more murky areas than fixed-price contracts. It’s unwise to assume anything about how the work will be billed.
Common areas of dispute in cost-plus contracts are the contractor’s compensation for supervision time and other labor, what are “billable costs” that should be marked up, and who pays to correct the errors of subcontractors or the prime contractor and his crew. No one wants to pay to have something done twice.
Your main question centers on whether the contractor should charge overhead and/or profit on materials or subcontractors that you pay directly. This can be handled different ways. Some contractors insist on hiring all subcontractors and buying all materials, so the question does not arise.
Others will allow you “carve outs” in which you can buy materials or hire subs directly and the contractor is not entitled to mark up those costs.
Under this type of carve out, the contractor takes no responsibility for the quality, condition, performance, or warranty of the products/subs you paid for directly.
Less frequently, the contractor will charge overhead and profit on the owner-supplied labor and materials, but take full responsibility for those portions of the job, including warranty claims. The argument is that the contractor has to coordinate with these subs, and install or work around the materials, so they are assuming risk and should be paid for it.
In your case, you ordered and purchased the cabinets, but the contractor ended up putting a lot of time into the order, delivery, and installation of the cabinets. The cleanest way to deal with that is to pay the contractor for his time spent dealing with the cabinets, but base this on hours spent, not a markup percentage for overhead and profit. In this scenario, you own the cabinets and can’t expect the contractor to handle warranty claims, etc. If you need to get the crew back to make adjustments after the job is complete, expect to pay for this.
Bottom line: There is no standard way to structure a cost-plus contract. But it’s always best to define with precision what will be a billable cost, and when an how the owner will charge for his own labor, both supervisory and trades work. If the contractor agreed to your direct purchase of the cabinets, it’s a fair assumption that this was a carve-out from the cost-plus contract, unless the contract or contractor stated otherwise. So I think you have a strong case to make that you will pay for his extra time dealing with the cabinets, but not overhead and profit on your direct purchase.
Should Cost-Plus Invoice Show Itemized Costs?
What should an invoice look like for a cost plus contract. The ones I’ve received are just a single line item without explanation. When I’ve asked for the bill to be itemized, the contractor runs me around in circles about how that’s note how they’re organized. Is that typical? I assumed (bad practice, I know) that the invoices would be broken out by labor and material or subcontract area, i.e. plumbing, electrical, etc.
As stated in the article, above, “cost-plus work is an open book process where bills from the contractor should include documentation of all hard costs.” It’s a tradeoff: The contractor has the security of getting paid for all work, including cost overruns; the owner has the security of knowing that he is being billed fairly.
So, yes, under a typical cost-plus contract, you are entitled to an itemized bill showing where the funds were spent. The level of detail certainly varies from one contractor to another, but it sounds like you are getting no detail — just a number and an implied “trust me”.
Many small contractors are not fans of paperwork and their system for organization and tracking invoices may be minimal. It sounds like your contractor does not want to take the time to prepare a proper invoice. Perhaps he also feels that your request for more details implies a lack of trust. I have seen contractors get defensive overt this type of request.
The best strategy, I think, is to say something like, “Nothing personal, I am happy with the work (if true), and I trust that your billing is fair, but my understanding is that cost-plus invoices should contain a detailed breakdown of how the money was spent.”
If, on the other hand, you do not trust the contractor, you may need to be a little more aggressive and say, “My understanding is that cost-plus billing is an open book process where the customer is provided with invoices for all billable costs from subs, material vendors, and inhouse labor. Can you provide this going forward?”
If he can’t or won’t you either have to proceed under his terms or find another contractor to finish the job. A key question is how much of your budget that you spent compared with how much of the job is completed. Are you on track to come in close to the original budget or are you headed toward significant cost overruns. Open-book billing can give you at least a rough idea of whether the project is on budget. Asking the contractor is also a good idea. Of course, if he is not keeping good records, he may not know the answer.
Loree A Smith says
Should I Pay Contractor’s Fee for Unused Allowances & Cuts To Job
Related to a previous question. On a cost-plus contract should I receive a contractor fee credit for allowances not used.. Ex: I purchased the lighting fixtures and most faucets and shower hardware.
Additionally, line items were removed prior to job start. Items with no upfront costs to contractor. Should I have to pay the contractor fee on those items for cost plus?.
There is no standard procedure for billing on cost-plus contracts. Each contractor handles this a little differently.
Ideally the answers to your questions are covered in the contract. If not, it becomes a matter of negotiation.
If I were the customer and had a $1,000 allowance for flooring plus a 20% contractor’s markup. And I ended up buying the flooring myself, with the contractors knowledge and consent, I would not expect to pay the fee. However, I would also not expect the contractor to help out if the product was defective or problematic.
On the other hand, the contractor might argue that he has put time and effort into discussing material option with you and pricing the options, so he feels entitled to some level of compensation.
Deductive change orders are a similar issue. When work is eliminated from a job, many contractors still feel entitled to collecting the markup for that portion of the work since they had planned for it, handled revisions to the plan, and spent other administrative time on writing and pricing the change order.
This may be relevant to your second question. If line items were removed early in the process, with no upfront costs to the contractor, then he does not have a strong claim that you owe him any fees for the work. However, he may not agree about what upfront costs were involved.
If the contract was cost-plus-a-fixed-fee for the entire job, then the contractor will not be too happy about reducing the overall fee due to the changes you refer to. Unless the scope of work is significantly reduced, and the time therefore reduced, then his overhead costs will not change much from small revisions to the plan. Trying to get small credits against the fee for these changes may harm your relationship with the contractor and not save you much money – so it may not be a fight worth fighting.
So if all is going well with the job otherwise, keep the big picture in mind. Look at both sides of the issue and do what you think is fair.
Frank DeMore says
Is he billing for off site charges like going to store for materials/gas use
Can Contractor Charge a Markup On Materials That Owner Buys?
Does a builder get a percentage of windows, cabinets on a cost plus if the home owner buys the supplies?
The short answer is that this is negotiable, as is just about everything on a construction contract.
Some contractors do not allow any owner-supplied materials, while others allow them. This is true for both fixed-price and cost-plus contracts.
In my personal experience, most contractors do not charge a markup on owner-supplied materials. This works fine if everything goes well, but becomes problematic if there are problems with the installation or performance of the materials.
It can become very problematic however, if there are problems with the installation of the owner-supplied materials or the installation of the surrounding materials. Who is responsible for the problem and the cost of fixing it becomes murky.
For example, let’s say the owner supplies a ready-to-tile shower base, while the contractor supplies the tile. What happens if the tiles start to crack? Who pays to repair or replace the tile? Who pays to remove and replace the tile base if it failed. You may claim the contractor installed it wrong. He may claim that you provided a substandard product and that you should bear all the cost of redoing the work.
Even with a product like a window, the contractor can claim that a future leak was due to the window design, not his workmanship.
The same issues can occur if the owner supplies some of the labor or hires his own subcontractors for part of the job.
If all these cases, it becomes unclear who is responsible for problems and the costs often fall to the owner, who has become, at least in part, an owner-builder.
To avoid these problems, some contractors are willing to take responsibility for owner-supplied materials (or subs) by approving them and charging a markup.
So, in the long run, it may be in your best interest to pay a reasonable markup on materials you provide as long as the contractor is willing to take full responsibility for the installation, performance and warranty of the material and other surrounding materials.
It’s hard to have it both ways – where you save money be buying materials at Home Depot, for example – but the contractor is expected to take full responsibility for those materials without charging a markup.
Make sure you clarify these issues with the contractor, preferably in writing, before proceeding.
See Also: Can Contractor Mark Up Everything?
NEK Jacobson says
Who Pays to Fix Errors on Cost-Plus Job?
We are at the tail end of our project, but are unable to finish the ground floor because of a leak in the foundation. The work passed inspection, but then started leaking afterward, and wasn’t mitigated by a sump pump. The GC put up drywall, even though the leak was coming in from the wall joint at that time.
My question is, is the remediation work (or any part of it) my responsibility to pay for, or the builder’s?
Thanks so much for your help!
I’m assuming this work is being done under a cost-plus contract. For the most part, cost-plus contracts pass all risk of cost overruns to the homeowner, which is why I am not a big fan of these, especially for large jobs where cost overruns can be extreme.
In general, it’s the contractor’s duty under cost-plus contracts to keep accurate records of all reimbursable expenses and be able to document these expenses if requested by the owner.
If unanticipated expenses are the result of the contractor’s negligence or gross errors, they may not be entitled to reimbursement. This issue may be covered in the contract in large commercial contracts, but is rarely mentioned in residential cost-plus contracts. In that case, it is up for negotiation between you and the contractor.
As a homeowner, I would not want to pay to redo work that was a direct result of the contractor’s error or negligence. This is just my opinion, but I think most courts would support this position. I don’t know enough about the specifics in your situation to say who is responsible for what costs.
For example, did the contractor build the foundation and drainage system? Is the foundation leak a result of errors in his work? Or is there a seasonal high water table that requires a sump pump despite reasonable efforts to manage site drainage and foundation drainage.
If a sump pump is required despite the contractor’s reasonable care and workmanship, then it would be your responsibility to pay for its installation. If the contractor has to replace drywall or other finishes that he installed over an obviously leaky wall, then you should not have to pay for this work to be done twice.
At least that’s my opinion. This is a legal question, so it is best posed to lawyer (which I am not).
Good luck in finding a mutually acceptable resolution. Working out a compromise is always far better and cheaper than a full-blown dispute.
NEK Jacobson says
Thank you so much for your reply; I have a meeting set up with a real estate lawyer to see what the best course of action is. I appreciate your comments!
One final thought…you mentioned that the work “passed inspection”. Passing the inspection by the building department is a very low bar, concerned primarily with safety – that the building doesn’t fall down, the toilets flush, and the electrical system works. It doesn’t necessarily mean that the work was done to “industry standards” or in a “workmanlike manner, a quality standard cited in many contracts.
Whether the work was competent and professional is a higher standard, but one subject to human judgement – such as competing “expert” witnesses in court. Sometimes it’s clear-cut, but often it’s up for debate.
Is Cost-Plus-A-Fixed-Fee Good for a New Home?
I am in the planning process of having a passive house built in Idaho. This home will be built in an area that has no experience with this. I have found a reputable builder and feel like to get the quality that I am looking for, a “cost plus set fee” might be the best way to go. This would give him assurance that he will not loose his shirt and not cut corners in order to save money. Is there a general “set fee” amount?
The most common approach to cost-plus pricing is adding a percentage to direct “billable” costs. Typical rates range from 10% to 25% of costs. I am not aware of any industry standard for cost-plus-a fixed-fee. The contractor will probably base his fee on the number of administrative hours and other overhead costs he expects on this project.
By all means, get an estimated cost from the contractor and you will see if his fixed fee is reasonable for the scope of work. If he cannot provide you with a cost estimate, then you are living dangerously. In addition, it is best if the contractor will agree to a guaranteed maximum price. Without this, the sky is the limit.
There are many potential problems with cost-plus contracts. Perhaps the biggest are:
Contractors who charge unrealistically low markup on direct costs may pad their direct costs to make back some of the money they need to stay in business. For example, they may bill out their workers at inflated rates. There is no industry standard that defines what is a direct cost vs. what is overhead.
The biggest problem, however, with cost-plus pricing is that the contractor has no incentive to hold down costs. If your plan includes a lot of fussy details and innovative materials and techniques, then you will be paying for your contractor’s learning curve.
I am not a big fan of cost-plus contracts, especially on large, expensive projects like a new house. To me, cost-plus is a last resort when you cannot find anyone willing to bid your project. If the project has too many unknowns to get a fixed bid, then take the time to finish the plan and nail down those unknowns. If that’s not possible, get a fixed bid on the known parts of the project and carve out the unknowns as allowances.
If the contractor is not skilled at estimating, then find one who is. It’s very considerate of you to not what the contractor to lose his shirt, but you don’t want to lose yours either! Cost-plus contracts can work, but they are risky and place all the risk of cost overruns on the owner.
Read more about the risks of cost plus contracts.
Markup Billed as Lump Sum at End of Job
We are in a cost plus 17% contract, it has been 14 months on the project and are nearing the end, we were just notified of the amount owed and were shocked that the 17% was not added in all along. This was not specified in the contract and we just assumed it was billed at that rate all along. Is this customary? We also never got the builders invoices just a line item spread sheet from the builder as to his costs.
We are not disputing the 17% just wondering if this is the usual way it is done and why it wasn’t in the contract.
Surprise charges at the end of a job are always troubling – whether they are for allowances, change orders, or any other reason such as yours.
In some cases, these are a direct violation of the contract – for example with change orders. More often, they result from some combination of sloppy billing practices and poor communication. If this is your contractor’s standard billing procedure for cost-plus contracts, he should have explained this to you clearly. Billing procedures are not always spelled out in detail in the contract but should be clear to all parties at the beginning of a job.
In my experience, this is not a common billing procedure. Overhead is usually included in each bill as a line-item charge along with a breakdown of direct job costs. Perhaps the contractor assumed that you understood that you were not paying the 17% markup since it was not indicated on the bill. Still, this should have been made clear to you.
While the bill for 17% markup was an unpleasant surprise, it does provide you with one advantage. It gives you substantial bargaining power at the end of the job. If any work is incomplete or faulty, you can withhold some or all of the final payment until the job is completed to your satisfaction.
john vanderheyden says
Not Sure If Cost-Plus Invoice is Padded
We hired a general contractor to construct an attached carport and the builder uses the “cost plus 15%”. This is still being constructed and is a verbal agreement where the contractor stated his only profit is 15% of the materials cost and labor. However, the owner has 3 employees working and he himself has only been on site for a total of 16 hours but is billing us his $25 hour labor rate for hours that he is not even on site. I have kept an ongoing log of the employees hours worked from day one because I wanted to verify. The owner has provided invoicing for the labor but at this point I believe him to be untruthful. Would it be appropriate to verify the hourly rate that he is paying his crew? He is saying the hourly rate varies from $8-21 an hour but I am concerned he is paying much less and keeping the money to himself. thanks
I’m not a big fan of cost-plus contracts, as you probably tell from my articles on the topic. They can work fine if the contractor is super responsible and everything goes as planned. But there are lot of perverse incentives in place to drive up costs – and all the risks of higher costs are borne by the homeowner.
In your case, you do not have a written contract (never a good idea), so there is little to fall back on in determining what is fair. In cost-plus contracts, as with much in life, the devil is in the details. The biggest question is exactly what costs are reimbursable? Travel time, saw blades, labor burden, the owner’s time in the office related to the job?
In most cases, these jobs are included in overhead and covered by the markup. But some of these costs might be considered billable by this contractor.
If he is billing out his employees at $8 to $21 per hour, you are probably getting a good deal. If the contractor is paying a carpenter $20 per hour, his true costs, including labor burden (payroll taxes, worker’s comp, bonuses, training, tool/truck allowance, etc.) is often 20% to 40% higher depending on what benefits he provides. Most contractors bill out their workers at the full rate including labor burden and then add their markup.
Another big question is what activities of the contractor are considered billable hours. The most common arrangement is that time spent on the job site are billable as direct costs, while time spent in the office or elsewhere are not billable and considered part of overhead. It sounds like you are being billed for at least some hours not spent on the job site.
You are only being charged a 15% markup, which is on the low end. The most common markup is 20% and is often more in high-end markets. So the contractor may be trying to compensate for the low markup by making more of his costs billable. There are a lot of moving parts here.
There’s no way for me to know whether you are being overcharged. However, it is very reasonable to request more detailed information about the contractor’s billing practices and to provide more detailed invoices. In general, cost-plus is an open-book billing system where the contractor is expected to provide reasonable documentation for all charges – and should be willing to provide full documentation if requested. If the hours billed do not match the hours spent on the job site, then you have a legitimate concern.
Asking him to verify what he is paying his employees, however, will probably not be appreciated by the contractor. At the end of the day, there has to be a certain level of trust involved for this, and any business relationship, to work. Once that breaks down, it gets difficult to proceed and get the job completed.
As a practical matter, it’s always good to owe the contractor a big check at the end of the job. Then you have some leverage in negotiations over the final cost of the job, and can dig deeper into these issues if you feel you are being overcharged.
Related Links: Are Supervision Costs Billable? 10 Reasons to Avoid Cost Plus
The Final Check
Owner’s Responsibility with Cost-Plus?
What are homeowner responsibilities for cost of repairs during construction with a “Cost Plus” contract?
Thank you for all you help.
The answer to your question depends on the specific language of the contract.
As with any construction contract, the owner (or owner’s agent) is generally responsible for providing the plans and specifications, inspecting the work, and making payments for completed work on a timely basis. He is also responsible for carrying certain types of insurance, typically Builder’s Risk, which protects the materials and work during construction.
The big difference with a cost-plus contract is that the homeowner assumes all or most of the risk of cost overruns. The contractor has little incentive to hold down costs.
In fact, there is an economic incentive for the contractor to stretch things out as long as possible. That is not to say that the contractor will intentionally drag his feet and waste time. It’s just the reality that economic incentives do affect our behavior, whether consciously or not.
It is a rare construction project that is completed early or below budget. It’s the nature of the beast that building projects almost always cost more than anticipated. This is why banks add 5% to 10% to construction loans as a contingency fund. Modest cost overruns are the norm. But, in some cases, jobs end up costing many thousands of dollars more than the original estimate.
Unless the cost-plus contract has a guaranteed maximum, any extra costs are borne by the homeowner. This is why I do not like cost-plus contracts. Best of luck with your project!
Read 10 Reasons to Avoid Cost-Plus Contracts
What Is Right Way to Calculate Cost-Plus?
After completing 90% of a new home project bid under a cost-plus contract (cost + 12%), we are in dispute with the homeowner on how we calculated cost-plus. Our former Project Manager, whose track record is not the best, gave me the following calculation to use in determining the amount to bill the client:
Total Invoice Costs / (1 -.12) = total amount payable by customer
For example: $100 / (1-.12) = $100 / .88 = $113.64
That is what I am using. The homeowner says I should be using:
Total Invoice Costs X .12 = total amount payable by customer
For example: $100 X .12) = 112
The former PM says that the homeowner’s calculation is for markup and our calculation is for profit. I cannot find any data online to substantiate the former PM’s calculation. The difference in using the former PM’s calculation vs. the homeowner’s on a $600K house is $9,840, of which we would have to reimburse the homeowner to achieve peace and garner confidence in us as a contractor.
Can you give me your input on this? Any assistance would be appreciated. Thank you.
This is a confusing point for most people – contractors and consumers alike.
In general, the building industry and standard contracts (like the AIA), use your customer’s method to calculate cost plus. That’s also the commonsense meaning of cost-plus. The final price is either your invoice cost plus a percentage – in your case, 12% – or the invoice cost plus a fixed fee.
Your PM’s formula is the correct way to calculate your company’s gross profit, also called “margin”. However, this is an internal calculation by you or your accountant, not a way to specify the price in a contract or communicate the price to your customer.
You use the margin calculation in your back office to determine how much markup your need in order to cover your overhead and profit. For example, to obtain a gross profit (overhead and profit) of 17%, you need a markup of 20%.
Read more on How to Calculate Markup vs. Margin.
Should Contractor Bill for Office Expenses?
On a cost-plus project, should the cost include all the builder’s office administrative fees plus the markup. Should the builder continue to hire employees during the project for his office staff and add them to your fees? If the project is forced to be shut down, should the builder continue to charge you the administrative fees plus the markup. We are over 2 years into this project (6 months shut down) and not even dried in yet. I am just baffled by these charges. We do not have a contract. The project is so way over budget we are being forced to totally shutdown. We are open to any advice.
Sorry to hear about your situation. I am not a big fan of cost-plus contracts and hear of many problems similar to yours.
In general, no, a contractor’s office expenses and administrative costs are not typically reimbursable on a cost-plus job. Administrative costs are typically covered by the markup, whether this is a percentage of direct job costs or a fixed fee.
In some cases, time spent on the job site by a supervisor is considered billable, but this should be spelled out in the contract. For example the AIA cost-plus contract AIA103, reads as follows: “The Cost of the Work shall not include…salaries or other compensation of the Contractor’s personnel stationed at the Contractor’s principal office other than the site office, except as specifically provided in [the contract]”
In the absence of a written contract, what exactly is billable becomes a matter of negotiation. It sounds like you contractor has been charging you for a wide variety of administrative costs that are not typically billable. It also sounds like the job has been badly mismanaged, causing large cost overruns.
It’s unclear from your email as to whether you started out with clear plans and a written estimate – which are strongly recommended whether the contract is cost-plus or fixed-price. As you have discovered, cost-plus jobs are very risky for owners who assume nearly all of the risk of cost overruns. Not having a written contract adds to the risk.
To terminate cleanly with the current contractor, you will need to determine what are legitimate charges, make a final payment, and terminate the contract in writing. Since there is not written contract, this should be fairly straightforward, except that the contractor may claim that you own him more money. To avoid risk of legal action, it’s always a good idea to consult with a lawyer before terminating a construction contract.
Going forward, I strongly suggest you get a fixed bid to complete the job and a written contract along with a clear description (plans and specifications) of the Scope of Work.
Read more on billing for job supervision.
Best of luck getting this job back on track.
Thank you very much for the advise. I regret not researching before we agreed to our building terms. We are really struggling with our approach to terminate our contract with our builder. Since I last wrote to you we have had more issues to deal with. The reason for our shutdown was we had been blasted by a major hail storm in January of which destroyed the roof of our house that had just been completed after 4 months to install. Along with broken windows and other damages. We could not proceed with the house until the roof and windows were replaced. At this time it still has not been completed. Our builder had obtained our builders risk policy of which of course we paid for along with a mark up. He had to file the claim with the insurance but will not share the information with us. I finally called the insurance company and the claim was paid and was paid double the amount that he told us. So now we know he has been double dipping. We are so upset with this situation.
Final Cost Is Double the Estimate on Cost-Plus Job
With a cost-plus contract, if the subs are all within 5% but the general contractor is 100% over on materials and labor, how can he estimate so inaccurately? Is this level of error uncommon?
Subcontractor estimates are usually pretty accurate as subs do one type of work over and over, so they are familiar with both their unit costs and the factors that drive cost variations. For example, a roofer can quickly estimate the cost of a 20-square roof, two stories high, with a steep slope that requires staging on the roof.
General contractors, on the other hand, have to estimate a wide variety of jobs with an endless range of job-site variables. Estimating is the most difficult part of the business for many contractors, especially those with limited experience on the “business side” of the business. That is, they might be capable craftsmen but lacking in experience running a business.
Nonetheless, being off by 100% is unusually bad – unless the scope of work changed dramatically from the time of estimating to the time of completion. I don’t know the absolute amount of the error. For example a $1,000 estimate that is off by $1,000 is better than a $20,000 estimate that is off by $20,000, although the percentage of error is the same.
There are many possible causes for estimating errors, although they are primarily on the labor side as materials estimates are usually pretty straightforward.
I’m not a big fan of cost-plus contracts as they often result in cost overruns for the owner, who bears all the risk of higher costs. The estimate is a non-binding “guestimate” and the contractor has little incentive to provide a realistic number and to live by it.
It is possible his original estimate was unrealistically low (by intention or accident) and that the final cost for the work was in line with what you would have paid under a fixed bid. It’s also possible that you are overpaying due to the contractor’s mismanagement of the project.
To find out what the job should have cost, you may need to bring in a third party such as a construction manager or professional estimator. If you originally received one or more fixed bids, that would also provide a good benchmark.
I think it is worth discussing with your contractor why his bid was so far off. Perhaps you could negotiate a lower final price, given the gross inaccuracy of his estimate.
Thank you for taking the time to respond, I appreciate your feedback.
The breakdown for quote was as follows with the contractors profit margin already on it. There was some general description as well added as to what amount each sub was budgeted for and also what amount was to completed by General.
Total Budget : 233,294.00
Sub Contractors 152029.44
I am waiting to have a meeting with general contractor for almost a month now since finding out the job is so far over, he is trying to find time to review. I am just trying to have the best frame of mind and angle to come to a reasonable solution as well as affordable.
Both materials and labor will run 100% or over.
Thank you for your time and further insight or suggestion you might have
Starting a job with “some general description” of the work is dangerous to your wallet – especially for a job of this size. Neither you nor the contractor can know exactly what the bid or estimate covers without detailed scope of work in the form of written plans and specifications. Without these it is not possible to provide an accurate estimate.
I have found that the lack of detail plans, and lack of a written contract, are the two most common causes of construction disputes that I have seen over the years. This is true whether the contract is fixed-price or cost-plus.
Even if you have discussed the job at some length with the contractor, without detailed written plans and specs, it is highly unlikely that you have the same job in mind. Each party will make assumptions about aspects of the job that are not fully described in writing and those two sets of assumptions almost never agree.
Additionally, without a detailed description of the job, you will have no way to determine when you have made changes to the plan, which almost always require an increase in cost.
In a fixed-price job, change orders are typically used when the owner requests a change to the plan. Cost-plus contracts don’t typically use change orders, but they should still make provisions for the contractor to document changes in the plan and the respective change in the final project cost. Without a clearly documented base case (the original plans and spec), it is hard to say what is a change to the scope of work.
When nothing has a price tag attached to it, and the contractor is not keeping track of his costs, it is easy for the client to keep adding upgrades over the course of the job and end up with a huge surprise bill at the end. It’s bit like overeating at an all-you-can-eat buffet, but later finding that many of the items had a la carte pricing. I don’t know if this was the case with your job, although this is a common scenario.
The contractor’s response may be that the owner wanted all these expensive changes, and he was just trying to accommodate these requests. Whether the contractor was required to notify the owner about changes to the project cost would depend on the contract language. However, even in the absence of a clause on “Changes to the Work,” I believe the contractor has responsibility to do so – unless the owner made it clear that this was a cost-is-no-object job.
In any event, it sounds like that was a communication breakdown somewhere along the way and that the contractor has not done a good job of keeping you informed of when and why the job was going so badly over budget.
How to negotiate at this point, with a large portion of the job still not complete is tricky. I might try to work on a negotiated bid for the rest of the project, that is a fixed-bid agreed to by both parties based on a clearly defined scope of work to complete the project.
Best of luck!
Should Contractor Bill For Supervision Time?
As a general contractor we estimated a job with a client, client then made a lot of changes and decided to go with a cost-plus agreement, now we are coming to the end of the project and client is now refusing to pay supervision costs, he believes that supervision costs should be included in the 15% mark up on the materials etc of job. Where do we stand on this?
Since there is really no “standard” approach to this issue, it’s best if it is spelled out in the contract. Some contractors charge for some or all of their supervisory time, others charge none, but use a high enough mark-up on material, labor, and subcontractors to cover these costs. In my experience, most clients would rather not have to pay hourly for office work they cannot see, but are more amenable to paying for supervisory hours on the job site spent by a lead carpenter, job super, or the contractor.
Since it sounds like you did not discuss this ahead of time or include it in your contract, you will need to negotiate a solution with the owner. Best of luck in working out a mutually agreeable resolution.
Read more on Billing for Supervision Time
Should Contractor Mark Up Owner-Supplied Materials?
On a cost plus 20% contact , if the homeowner buys some material themselves should the contractor charge 20% on those materials?
Every contractor handles cost-plus work a little differently in terms of marking up material and labor charges. In my experience, most contractors have no problem with the owner purchasing a small amount of specialty materials and generally do not add markup on these. Some actually appreciate your chasing down hard-to-source materials. However, buying a large quantity of materials for a job changes the nature of the job and the contractor may need to make pricing adjustments.
Some contractors discourage owners from buying materials since the contractor has to deal with receiving, storing, installing, and possibly repairing or replacing the material if there are problems. Contractors prefer to work with products and materials that they have experience with and confidence in. For that reason, I can see why a contractor may want to charge some mark-up on materials you provide. Whether or not they supply the materials, a contractor needs to charge a certain amount of total markup to cover their overhead costs. They will try to build this into their price one way or another.
On a cost-plus job, if it takes longer for the contractor to install unfamiliar materials that you provide, the contractor can bill you for the extra labor hours. On a fixed-price job, however, the contractor does not have this option, so may be more leery of using owner-supplied materials.
One big concern is who is responsible for problems associated with the owner-supplied materials. If you accept full responsibility for the materials, including any delays or extra labor costs associated with them, and any warranty issues, then you have reduced the contractor’s risk and overhead associated with the materials. Under that scenario I think it is reasonable to pay no markup or a reduced markup on materials your provide. However, be aware that the contractor may try to recover the lost overhead by making other pricing adjustments.
A related issue is whether a cost-plus contractor is showing you his actual cost of materials and subs or showing you retail prices where he has received a discount. For example, contractors may get substantial discounts on certain items such as windows, appliances, and plumbing and electrical fixtures. To keep everyone honest, a cost-plus contractor provide you with his actual invoices and mark up these actual prices. Otherwise, he is adding markup twice.
Best of luck with your project!
JCM Framing Contractors, LLC says
If you don’t have a signed contract yet, you should discuss this with your contractor.
Make sure to spell out in the contract which items you will purchase and how that affects the 20%.
If you already have a signed contract, the homeowner shouldn’t buy any materials without discussing it with their contractor first. The contractor may have already ordered those materials; if it’s a custom order, there could be a large fee for restocking (returning) the materials or the order may not be returnable at all.
Also, when the contractor accepted the job, he or she may have counted on 20% of the entire material order as being part of his or her profit.
You can always discuss this with your contractor after you’ve signed on with them but you can’t change the terms of a contract unless both parties agree.
Peter Mclaughlin says
Should Contractor Mark Up Burdened Labor?
If a contractor told us that, the contract was cost plus 20%, then gave us a sheet with hourly rates for his men. For example $60 per hour for the laborer. Then we get the bill:
Plumber – $2000 plus 20% (we agree with this)
Laborer – 20 hours times $60 per hour plus 20%. This we don’t agree with. If he wanted $72 per hour he should have said so, how can he put 20% on his own laborer.
Who is right?
Short answer: It is customary to mark up employee labor costs in a cost-plus contract. However, the rate that is marked up should be his actual labor costs – not a number picked out of the air.
Every contractor prices jobs a little differently, whether they are working fixed-bid or cost-plus. With cost-plus contracts, the contractor’s costs are exposed to the owner, which can sometimes lead to conflicts, especially over labor markups, as you describe.
In most cases, contractors will mark up subcontractors, materials, and labor on a cost-plus job. They may mark up each cost category by the same rate, or by different rates. A 20% markup for cost-plus work is pretty typical. The contractor may bill out his own management or supervisory time as a labor cost, or include it in overhead, but should not mark up his own supervisory labor.
For labor rates, contractors typically mark up “fully burdened” labor – that is, the base labor rate plus all the added costs of hiring the employee. Labor burden includes such things as payroll taxes, worker’s comp insurance, health insurance, vacations and other employee benefits, and truck and tool expenses if covered by the contractor.
Labor burden typically adds about 25% to the base pay rate, but it may be as much as 50% in very high cost markets. If your contractor is billing you $60 per hour a laborer, and his labor burden rate is 33%, then he should be paying the laborer a base rate of $45 per hour ($45 x 1.33% = $60). That seems very high for a laborer, so I think it’s fair to ask your contractor what is the basis of the $60 billing rate. However, a skilled carpenter might make that much in a high-cost market.
While it is standard for contractors to mark up fully burdened labor, the base rate should be his actual labor expenses – not a made-up number. So the 20% mark-up may be fair, but the $60 billing rate may be inflated. In that case, the contractor is “double dipping” by marking up the labor twice.
It’s definitely worth a discussion with your contractor to clear things up. It’s quite possible that the contractor is confused about this issue as how to calculate overhead and markup is a source of much confusion and much debate among building contractors.
J T says
Huge Cost Overruns on Cost-Plus Remodel
We are working with a contractor that we signed a time and materials contract with. We agreed to his estimate and had a reasonable amount set aside for overage. As of this week we have paid the agreed upon amount ($98,000). Based on his original estimate we still have $58,040 worth of work to be done. Some of his original estimates have tripled and quadrupled. What action if any do I have available. Please help!!!
Sorry to hear about your situation. It’s a tough one, but unfortunately not uncommon with cost-plus contracts. I rarely recommend cost-plus contracts as the homeowner assumes all the risk of cost overruns and the contractor has little incentive to hold down costs.
I wish I had better news for you, but the essence of a cost-plus or time-and-materials contract, is that you agree to pay the labor and materials necessary to complete the job. The estimate is typically non-binding. It is not a fixed bid, but simply an educated guess about what the project will cost. Since the word “estimate” is sometimes used to refer to a fixed-price bid, this is a frequent cause of confusion.
Some cost-plus bids include a not-to-exceed (maximum) price or other cost controls, but most are open ended. Since invoicing is usually done on a regular basis, it should have been obvious to the contractor that the final cost was going to far exceed the estimate. At that point, the contractor should have discussed this with you as a matter of good business practice. However, he was not legally obligated to notify you that you were running over budget unless this was specifically stipulated in the contract – a good idea, but not common.
Even if some of the cost increases were due to changes in the plans or specs after the work was started, you still should have been informed about the costs of any such changes.
Time-and-materials contracts are typically open book. The contractor is supposed to provide the owner with detailed records of all costs, including actual invoices for materials and subcontractors if requested by the owner. Given the size of the overage, you are certainly justified in asking for full documentation of all costs before paying any additional invoices.
You are also free to terminate with the current contractor and to find someone else to complete the work, if you think you can get the work done for less money. You can also try to negotiate with the current contractor to complete the remainder of the job for a fixed price, so you don’t get any further cost surprises.
If you feel that the contractor intentionally mislead you, you may want to file a complaint with your state’s contractor licensing board or consumer protection agency. It may also be worth consulting a lawyer, who may have other ideas, but I would be surprised. Best of luck with a tough situation.
Read more about Estimating Errors & Cost Overruns
Thank you so much. Our house is torn apart and we need to come up with a solution to put it back together. This contractor has done work for other people we know and all we knew was that he is expensive. We have several line items on the original estimate that we will not be able to complete. What I have a hard time understanding is certain things like brick work, soffit, fascia and gutter prices tripled. He knew the size of the addition so why would these numbers jump up so much?
Is there any recourse if we feel that he low bid to get the job?
Thank you so much for your time in this. Hopefully we will be able to find a solution.
Did you make a lot of changes to the plan after the contractor provided an estimate? Assuming that you did not make huge changes to the plans, it’s hard to say why the estimate was so far off. Either they did a very poor job with the estimate or, as you suggest, may have intentionally submitted an unrealistically low bid to get the job.
Did you get other estimates for this work and were they in line with this contractor’s original estimate?
If you feel that the contractor has acted dishonestly you can file a complaint with your state’s contractor licensing board or state consumer protection agency – often part of the attorney general’s office. In some states, these agencies can help you file a complaint and help you resolve the dispute through mediation or arbitration. Many of the jobs that end up in arbitration are based on cost-plus contracts according to a construction arbitrator I know.
In preparation for any form of dispute resolution, you should start documenting everything you can about the job. Take photos of the work completed, keep copies of all written correspondence, and keep a dated log of all conversations with the contract. Good documentation is critical to presenting your case in any type of proceeding.
You can also contact a lawyer to see whether there is any other legal recourse. Low-bidding to win a contract can constitute fraud on public works projects, but I’m not sure if the same holds true for a residential cost-plus contract.
Again, best of luck with finding a solution.
Thanks again. We made no changes to the original plan. We did purchase upgraded sliding doors and that was the only thing we did that may have been different from the original bid. We were aware of the price increase for said doors. We can account for about $5000 for the upgrade.
Questionable Charges on Cost-Plus Job
In the midst of reconciling a cost plus percentage contract. The owner provided four additional allowances to be built into the design build contract to cover change order related costs. The GC used an affiliate (family member) company, non-disclosed, to perform general site maintenance tasks. The contractor and the affiliate company were based two hours away from project. It would appear that a number of costs that should have been applied to the base contract were rolled over into the various allowances. In addition, the labor portions of the affiliate were lump summed together, so it is nearly impossible to allocate costs and many of the tasks that were invoiced were not remotely within the scope of the allowance.
I found where we had been invoiced for a $2300 laser level had been purchased and was told that it was common practice that we allow the GC to keep the equipment as it would be cheaper than renting it for the three weeks it appeared to be in use. I’m getting push back when asking for a cost breakdown for a $13k punchlist that had been allocated to a fire sprinkler allowance.
None of the tasks on this list were remotely associated to the the scope provided in the allowance. Why are we paying X amount to have debris cleared from a roof? Isn’t it the GC’s responsibility to backcharge the contractor that failed to clean up after themselves? I thought that this was a transparent process, but not so sure anymore.
In most cases, I do not recommend cost-plus contracts for large jobs as they often lead to cost-overruns and disputes with contractors. It’s always difficult, at a distance, to untangle these sorts of issues. For example, I’m not sure what you mean by “the owner provided four additional allowance items”.
In general, cost-plus contracts do not make use of allowances and change orders as work is billed on a time-and-materials basis. So it’s not clear to me why some of the work was billed by cost-plus while some has been “rolled over” into allowances. Perhaps you have a hybrid contract of some sort. There are an endless number of possible variations and I don’t know the particulars of your contract.
However, it sounds like the contractor has not done a good job of communication and transparency in billing, which should be an underlying principle of any cost-plus contract. Some contractors are very good about this, while others need to be asked to see detailed invoices of materials delivered and work completed. Some contractors are disorganized and cannot easily provide good records – in which case you can never be confident that you are being billed fairly. There needs to be a certain level of trust for this to work as you cannot be on the job every day counting who worked for how many hours.
Being invoiced for a $2300 laser level is definitely not appropriate. While tool rentals and “consumables” such as drill bits and blades are often included in billing, the purchase of a laser level is way out of line. Sounds like they bought a very high-end unit at your expense. In general, a laser level is a basic tool that the contractor would be expected to own. And even if they needed to rent special equipment for your job, the rate should be well below the price quoted – I would guess $100 to $200 per week at most.
Sounds like you need to schedule a meeting with the contractor to go over the billing procedures and invoices. Don’t be afraid to ask for explanations if anything is unclear. You may want to have a friend or advocate sitting in with you if you think that would be helpful. If the contractor cannot provide a clear record of billable job costs, then you will need to decide whether you wish to contest the charges. At that point, it would probably be a good idea to speak with a lawyer.
Lynn jaynes says
Should We Pay Markup on Tax?
I do not think a fee should be charged on the tax…in other words, on a cost plus 25% basis, 25% of the cost of any labor and any product would be charged to the client, PRIOR to tax being added to total charge. Is this correct?
There are no hard-and-fast rules about this or any other building contract – each contractor has his own recipe for coming up with a price. Cost-plus work seems pretty cut and dried, but it is not always 100% clear what is a direct cost that should be marked up and what should be counted as overhead, especially supervision time by the owner.
For example, see this link on Billing For Supervision.
The general concept, however, is that the contractor is marking up all direct costs attributable to a specific job. That typically would include sales tax he has to pay on materials. It would also include “labor burden,” that is, his true cost of hiring a worker, not just his hourly rate. That might include payroll taxes, worker’s comp, and other employee benefits. So some of his taxes are typically included in direct costs and marked up as you describe.
Cost-plus bids should be “open book.” You should be able to see where to money is going and what is being charged as a direct cost. It is best to discuss these issues clearly at the outset to avoid misunderstandings half way through the job.
You can read more on the at Cost-Plus FAQs.
Can Labor Costs Exceed Cost-Plus Estimate?
If you go with a cost-plus-a-percentage contract, can even the labor costs go higher than what is in the contract?
Sorry to say, but with any cost-plus contract, the labor costs can definitely go higher than the estimate. In fact, the labor costs are the biggest unknown. On most jobs, it is pretty straightforward to price out the materials. It’s the labor that is most contractors have difficulty estimating.
On a cost-plus job, the “estimate” is really just a best guess. On a fixed-price contract, people often use the terms “estimate” and “bid” interchangeably, causing some confusion. The bid price is a fixed price that is agreed upon to complete the described work.
It is possible to put some limits on the price of a cost-plus job in the form of a not-to-exceed number if the contractor will agree to that. However, most contractors who work cost-plus resist putting any cap on the price.
In general, I would avoid cost-plus on a large job, whether a new house or a large remodel. It’s just too risky for the owner, who holds all the risk for costs spiraling out of control. On a cost-plus-a-percentage, the contractor has little incentive to hold down costs. Cost-plus-a-fixed-fee is less common, but better for the owner as the contractor doesn’t profit from running over budget.