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bidding vs hourly in res. construction

marcjb's picture

Hi all,

I'm inclined to think that bidding is inherently unfair. There's simply no way to accurately forecast the cost of a job, so it will either cost the owner more than it should or the bidder will receive less than his due. Sure, they both agreed on the price but that doesn't remove the element of unfairness.

Alternatively, the two agree that a certain hourly wage is fair. The owner is presented with all the materials bills and pays exactly that. The two can also make an arrangement for paying insurance and other incidentals. My point here is that there's a friendlier relationship in this type of contract. What do you think?

Marc

(post #120182, reply #1 of 166)

That sound you hear is a can of worms being opened.


With hourly work, how does the owner know in advance if s/he can afford the project? Sure, maybe the builder can provide an estimate, but then if so why not do the job for the estimate, subject to adjustments for changes made during the work?

Many jobs are easy to put a price to, one that's fair for both parties. I try to do my jobs fixed price whenever possible. The longer and more complicated, the less likely I am to give a fixed price, but it's my preferred method.

(post #120182, reply #3 of 166)

"With hourly work, how does the owner know in advance if s/he can afford the project?"

Exactly, and this is why I asked the labour/materials rule of thumb question in another thread. I've always used the 60/40 rule when negotiating with clients and it has served me well, but I wanted to hear some other opinions and they bear out my experience. I never bid and I have excellent relationships with all my clients, most of whom have become good friends. My work life is a little nirvana. :)

(post #120182, reply #5 of 166)

>>labour/materials rule of thumb


I didn't realize that was your topic. I read the first few posts but honestly I think it's nuts to even try to develop a rule like that. I could go back thru a year or two worth of work in my books and tell you how huge the range is. There isn't a rule of thumb worth using unless you do the same thing over and over.

(post #120182, reply #2 of 166)

life's not fair.


life's a gamble.


 


why should construction be any different.


 


but ... to your point ...


"There's simply no way to accurately forecast the cost of a job,"


sure there is.


 


experience.


 


Jeff


    Buck Construction


 Artistry In Carpentry


     Pittsburgh Pa

    Buck Construction

 Artistry In Carpentry

     Pittsburgh Pa

(post #120182, reply #4 of 166)

Part of being a knowledgeable contractor is the ability to price a job accurately.  This gives both you and the customer a definite price to work with.


in an hourly situation can you imagine the mess of problems that may arise?  The homeonwer feeling that the contractor is taking too long... milking the job.  The homeowner disputing the breaks or time to run for material? 


Then we deal with the problem facing efficient contractors.  If I can finish a job in less time than most of my competitors because I am more skilled, do I deserve less pay?


Are you a contractor or homeowner... or neither?




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #8 of 166)

"Part of being a knowledgeable contractor is the ability to price a job accurately. This gives both you and the customer a definite price to work with."

So we have to disagree. With all the variables in construction costs, pricing a job is inaccurate imo, and therefore inherently unfair. However, if you can do it, bravo.

"in an hourly situation can you imagine the mess of problems that may arise? The homeonwer feeling that the contractor is taking too long... milking the job. The homeowner disputing the breaks or time to run for material?"

It's never been an issue in my experience. Not once.

"Then we deal with the problem facing efficient contractors. If I can finish a job in less time than most of my competitors because I am more skilled, do I deserve less pay?"

Of course not.

"Are you a contractor or homeowner... or neither?"

I'm both. Are you neither?

(post #120182, reply #10 of 166)

I've been a contractor, self-employed, for the past 21 years.


imo, if you cannot bid the jobs then you shouldn't be in business.


your question about bidding hourly vs per job sopunds like the kind of questions a true novice would ask.  It sounds like you really have no idea on how to bid a job properly so to minimize your risk of loss you want to go the safe route and make it an hourly deal.


If you have customers that go for it then great.  However, I do not suspect many would go that way for anything more than some minor handyman services.


Most guys here are contractors, not handymen.  The projects we do probably wouldn't be suitable for hourly rates.


I could just imagine a guy here building an entire house and billing by the hour.... LOL that would be the day.


Like Jeff Buck said earlier..... "experience".  That is the one word that sums it up best.




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #11 of 166)

I could just imagine a guy here building an entire house and billing by the hour.... LOL that would be the day.


That day has come and gone.  Gamble House, Pasadena.




"...craftsmanship is first & foremost an expression of the human spirit." - P. Korn

bakersfieldremodel.com

(post #120182, reply #16 of 166)

""Most guys here are contractors, not handymen. The projects we do probably wouldn't be suitable for hourly rates.

I could just imagine a guy here building an entire house and billing by the hour.... LOL that would be the day.

Like Jeff Buck said earlier..... "experience". That is the one word that sums it up best.""

Are You serious? Pretty insulting comments there.
Negotiated Fee work is quite common.

You need a better imagination !!

Been doing this as a licensed contractor damn near as long than you and Jeff combined and I have done probably 60-70 complete custom houses or whole house remodels on Cost + a Fixed fee or Cost + a percentage. I have done more dollar volume in work under that type contract than under a Fixed Price contract.

Hmm come to think of it the last commercial project I supered on was done under exactly the same type Cost plus a Fixed Fee contract. (Over 2.5 million worth of work)
Biggest problem with Fixed Fee is getting the lenders (not owners) to accept it.

My own projects ranged from 100k up to what would be close to 1 m. in today's dollars.
Never heard one complaint I couldn't deal with by a little explanation to the owner of the issues involved.

Just because you haven't done it or don't like it doesn't make it a "Handyman" deal. The best TRUE CUSTOM builders I know of around here always worked under a cost plus basis of some type.
Estimate the costs involved based on information given, add your fee or percentage and then roll with the punches as the owners and architects hammer out the finished project details.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #17 of 166)

Cost + a Fixed fee or Cost + a percentage


and which of those two are hourly?  They both sound like a fixed pricing of some sort.  Cost plus a fixed amount.


 




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #18 of 166)

Both.

Only fixed part is either the Fee or the Percentage.

Overall job cost is what it is.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #22 of 166)

No, the overall job cost is not what it is.  There are many costs that are difficult to  accurately quantified on a per-job basis. Insurances, office costs, etc.


You said you are charging cost plus a fixed amount.  In essence, you are charging a lump sum or relatveliy fixed sum.


This is not "hourly rates".


So, again, you've completely missed the message.  Do you just like to argue with me in particular or do you regularly get so mixed up?


hourly rates or even "cost plus fixed rate" are nice safety nets for contractors that are not completely comfortable with estimating but I still contend that an experienced contractor should know how to bid a lump sum project.  Hourly rates make sense for handyman repairs not large projects with the limited exception of very unique projects.


 




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #28 of 166)

Come back to discuss this after you learn about the various types of contracts. You appear to need to get educated.

I might suggest you talk with some of the more experienced people here who have been successful with them or perhaps your lawyer.
As I said in my first post... Pick your poison, the one your client and yourself are most comfortable with.

"Cost" includes all hard costs, ie. labor, including burden , material and subs overhead.
"Fee" (whether fixed or %) is an amount added to that.

There is no "Fixed Dollar amount for the entire project, there is an estimate.

"Fixed Bid" is a given dollar amount for the project.

BTW there is also a "Cost (Price) not to Exceed" contract.

I don't like to see misinformation about whether one can be successful in using any or all of these contracts put out by people who are ignorant of what they mean and have no real world experience using them.

I am completely comfortable bidding fixed bid work. Have done so , working on my project now that is $1.2 million that way.
I prefer Cost + a Fixed Fee however and work hard to get a contract signed in that format.

When was the last time you did a $1.2 million contract Pete?


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #35 of 166)

Aside from it being none of your business, I have bid and won many substantial and profitable contracts.   And guess what... they were always bid as a lump sum.


futhermore, you are apparently the one that does not understand the difference between hourly rates and fixed sums, in whole or in part.  you are arguing my position on hourly rates by countering with every option other than hourly rates.


Furthermore, you think I do not understand contracts?  you apparently do not even know what a contingency is based upon your previous post.


I think it is you that needs to learn a few things... reading comprehension being at the top of that list.  Logical debate being a close follower.


btw, lol, how do you have a 1.2 million dollar contract if it is not a fixed price? LOL




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #41 of 166)

""futhermore, you are apparently the one that does not understand the difference between hourly rates and fixed sums, in whole or in part. you are arguing my position on hourly rates by countering with every option other than hourly rates.""

HUH? Just what is your position on hourly rates?

Cost plus a FIXED FEE uses hourly rates as the basis of the cost.
As does COST PLUS a %.
as does a FIXED SUM.

You:

"No, the overall job cost is not what it is. There are many costs that are difficult to accurately quantified on a per-job basis. Insurances, office costs, etc.

You said you are charging cost plus a fixed amount. In essence, you are charging a lump sum or relatveliy fixed sum.

This is not "hourly rates"."'

Ok,
1) If you can't quantify actual per job costs of insurance office costs etc. then you should be talking to Gerald Hayes, Mike Smith, or many others here who can teach you how to track your costs accuratly.... not me... but I can teach you how to operate with FIXED FEE contracts and make money.
A requirement though is that you open your ears and listen and be willing to learn.
2)Yes I am charging a "lump sum" for my FEE, not for the job. See the difference?
3) Hourly rates are a job COST.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #45 of 166)

I suppose your confusion comes from your apparent disregard for the OP's position that he thought hourly rates would be a better way to do business.


I expressed my opinion that hourly rates are better suited for handyman and repair work.


you were insulted and thought that everything you do is somehow hourly rates although it is not.


I was wrong about your 1.2 million project not being fixed rate.  My apologies.  Is this your contract?  or are you just working on this job?  I now get the impression that you are just working on somebody else's 1.2 million dollar project.  If that is the case, I've worked on quite a few substantially larger projects than that... all lump sum too.  I have had my own contracts that were well into six figures.  These were all lump sum jobs too.


Are you trying to use the clout of someone else's 1.2 million dollar project to lend credibility to your position here?


If you think you can completely quantify incidental costs into every project then you have no idea of which you speak.  the expense of being in business exist whether you are on a project or not.  if you have 2 months down in the winter (end of year), then how do you quantify that expense into the jobs you've alrady done for the year.  I know this may be splitting hairs to some extent but there are many costs that simply cannot be accurately quantified.  Then again, you do not understand how contingency works so maybe you really don't know how contracts and expense qwuntification work.


My idea of cost plus fixed rate means that you charge the cost of the project plus a fixed sum of money for yourself or the company, depending on your business structure.  Each project, being somewhat unique, has different parameters for what is a cost.  A small deck job that you can do yourself might be that the cost is merely permits and materials.  A project involving numerous subs and whatnot means that the costs include a multitude of things including materisla, subs, maybe some hourly employees, etc.


Being hired to manage a project is not the same as working for cost plus a pecentage or fixed rate.


I still think that working on a cost plus basis is a safety net for those that are uncomfortable with lumo sum pricing or contract pricing.  I also think that cost plus pricing is only limitedly acceptable in private contracts with homeowners.  Industry standard for commercial projects or contracts in residential markets where you are sub bidding to the GC is lump sum bidding... with the very rare exception of very unique work.


 




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #47 of 166)

Pete,
If the OP sets his hourly rate to include his profit and overhead and his wage then he has set an hourly rate.
He has not set a FIXED BID.
Final costs of the job are what they are.

"'I was wrong about your 1.2 million project not being fixed rate. My apologies. Is this your contract? or are you just working on this job? I now get the impression that you are just working on somebody else's 1.2 million dollar project. "'

My contract , I am GC and hold all financial responsibility to get the job done at the fixed and agreed upon price outside of written change orders.
The previous job of $2.5 million was done under the Fixed Fee Contract by a larger contractor than I for which that contractor was paid a FIXED FEE plus all Costs and I was hired directly by the owner as Site Superintendent, for which I was paid a FIXED FEE, all COSTS and an HOURLY WAGE.
I have worked under others at a Fixed Hourly Rate , have done Fixed Bid and Cost Plus jobs over the past 40 years

""Then again, you do not understand how contingency works so maybe you really don't know how contracts and expense qwuntification work."'

LOL.. BTW do you return any unused portion of contingency to the owners?
Just checking to see how you think it is used. If it is really contingency and none come up do you claim it as profit or return it to the owner since it was an unnecessary increase in the contract amount for the work delivered.?

""I still think that working on a cost plus basis is a safety net for those that are uncomfortable with lumo sum pricing or contract pricing. I also think that cost plus pricing is only limitedly acceptable in private contracts with homeowners. Industry standard for commercial projects or contracts in residential markets where you are sub bidding to the GC is lump sum bidding... with the very rare exception of very unique work."'

You are entitled to that opinion and You already made your opinion clear. Problem is it is just your opinion and has no relevant basis in fact.

""Are you a contractor or homeowner... or neither?""

"" 117073.11 in reply to 117073.9

I've been a contractor, self-employed, for the past 21 years.

imo, if you cannot bid the jobs then you shouldn't be in business.

your question about bidding hourly vs per job sopunds like the kind of questions a true novice would ask. It sounds like you really have no idea on how to bid a job properly so to minimize your risk of loss you want to go the safe route and make it an hourly deal.

If you have customers that go for it then great. However, I do not suspect many would go that way for anything more than some minor handyman services.

Most guys here are contractors, not handymen. The projects we do probably wouldn't be suitable for hourly rates.

I could just imagine a guy here building an entire house and billing by the hour.... LOL that would be the day.

Like Jeff Buck said earlier..... "experience". That is the one word that sums it up best."'

I suggest you go back and read the first 20 posts. Read the tone of those who posted and their attitude toward the OP.

What the OP says he believes is workable is in fact workable, and isn't done because He , or I , or Mike Smith (when he has done it) don't know what we are about or because we do "Handymans" jobs or because we lack knowledge.

PS. Would love to see pictures of you $million plus completed jobs.

I am not saying that there is anything wrong with FIXED SUM contracts, I am saying there is also nothing wrong with COST PLUS contracts, and deriding an individual who chooses to use them when both he and his client prefer them is questionable.

Edit for some of the typos


Edited 2/24/2009 3:09 pm by dovetail97128


Life is Good

(post #120182, reply #51 of 166)

you keep mincing words about your 1.2 million dollar contract so I get the feeling it is not a job you sold for 1.2 million but something that you have a part in as an employee or hired sub or something along those lines.


A contingency is not something that is charged as part of the original contract.  it is an amount budgeted to cover additional unforseen expenses.  If no unforseen expenses arise then none of the contingency budget is spent.  There is nothing to refund.  A contingency is usually set as a percentage of the original contract amount and is used as a way to facilitae the smooth operation of a job by avoiding the need to stop for change orders everytime an extra arises.


With regard to lump sum contracts you said:


You are entitled to that opinion and You already made your opinion clear. Problem is it is just your opinion and has no relevant basis in fact.


You are dead wrong and my opinion is absolutley rooted in fact.  If you had even a fraction of the experience you claim to have with bidding then you would know that almost every single job in the commercial field requires a lump sum bid.  Look at government bid requests for construction projects... almost all if not all require a lump sum bid.  The vast majority of all bidding in construction is done as a lump sum bid.  You could do a quick survey of the guys here to get a quick assessment of whicih is the most prevalent contract arrangement.... no doubt it would be lump sum.




 


I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic


 


Take life as a test and shoot for a better score each day.          Matt Garcia

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

I refuse to accept that there are limitations to what we can accomplish.        Pete Draganic

 

(post #120182, reply #50 of 166)

pete... check  this  out....


http://forums.taunton.com/tp-breaktime/messages?msg=106306.1


Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore

Mike Smith Rhode Island : Design / Build / Repair / Restore

              www.mfsmithbuilder.com

(post #120182, reply #55 of 166)

Thank You Mike..

""Has me plenty nervous."'

And indeed it did.
First time with ICF, for myself and most of my subs.
First time using the ICF sub.
First time using the framing sub.
First time with a bank that was under scrutiny from the feds. (Still the case)
First time doing a 2 hour fire rated assembly ceiling.
First time doing attic room trusses with a 53' span.
First time being responsible to DEQ over winery waste process water disposal.
Architect was hired on an "as need basis", not to complete an entire set of drawings.

Lots of potential for problems there IMO when I posted that..

Contingency set at 4.8%, To date I have used approximately 1/2 of that for unexpected earth work problems, ( boulders), having to raise the building because of amateur site survey errors in regards to the septic elevations and needing to increase the lower truss chord depth (incomplete engineering at time of signing of contract) and paying for extra crane time to set trusses due to weather conditions.
Balance is being doled out as we make progress to buy improvements with the owners making the decisions.
As of this months billings I am almost right on the button in my expected costs and at this point foresee no extra charges to the owner beyond the changes they have come up with in electrical and plumbing.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #6 of 166)

Personally I agree ( I am also in a definite minority here at BT)

I call bidding a poker game, both sides trying to win.

I have done far and away the majority of my work over the last 40 years under some version of T+M.
I generally use Cost plus a Fixed Fee.
I avoid Cost + a Percentage as it leads to suspicions on the part of the owner IMO.

The only reason I am not doing the 1.2 mil. job I am doing now under Cost plus a fixed fee is that the lender insisted upon a Fixed Price Contract.

PS:.

Being a "knowledgeable contractor" does not preclude doing jobs of any size or complexity under T+M or Cost Plus a Fixed Fee, Cost Plus a Percentage or Fixed Price contract.

Pick your poison , they all work just fine.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #21 of 166)

"cost  plus  a  fixed  fee" has  a lot  of problems  also


if  you   anticipate  that  your  fee  will  be  based on two  months  of  overhead  and  the project  takes  3  months..  how  do  you  make  up the loss of  revenue?


it  still comes  down  to  accurately  estimating  your  project  costs  and  duration 


(  time is  money ).....  if  you  can  do   that  so   your  cost  +  fixed  fee  is  accurate... then   you  can  also   bid  a  "lump  sum"  contract


and  lump  sum  contracts  can  include  Allowances  for  the  unknown  "owner-selected"  items


we've  worked  T&M......Cost Plus Fixed Fee..... and  Lump Sum....  both  my  customers  and  I  prefer  the  Lump  Sum


Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore

Mike Smith Rhode Island : Design / Build / Repair / Restore

              www.mfsmithbuilder.com

(post #120182, reply #23 of 166)

After thirty years in the biz, I've concluded that t&m is the way to go. I worked fixed price, won some and lost some, for many years and never liked the inherent unfairness of it. I've been t&m only for about ten years now, I have a long list of happy clients, and all my work is custom.

Of course the client wants to know how much the project will cost. My experience allows me to ballpark it within 5% plus or minus, and with t&m my client knows he'll get exactly the right deal. I don't want to be immodest but obviously, I'm not a slacker and my building and problem-solving skills are excellent and my reputation reflects that. So t&m works well for me.

(post #120182, reply #26 of 166)

Of course the client wants to know how much the project will cost. My experience allows me to ballpark it within 5%


Wow - your powers of foresight are nothing short of miraculous!   


I don't want to be immodest but obviously, I'm not a slacker and my building and problem-solving skills are excellent and my reputation reflects that. So t&m works well for me.


Stunning powers of foresight, 'no slacker' extaordinary building and problem-solving skills, sterling reputation based on a long list of happy customers, not to mention inherent modesty - hard to imagine why bidding work would have been a problem, but if T&M works better in your market, then I say go for it!




"...craftsmanship is first & foremost an expression of the human spirit." - P. Korn

bakersfieldremodel.com

(post #120182, reply #29 of 166)

I ran work for a guy who did almost all of his jobs t&m. We had about five at once, all 600K plus.

His selling point was that the client was never ready and that so many allowances were required, it was easier in the long run to do t&m.

He also figured less mark up on the t&m, figuring more office work was involved in pricing and administering change orders on a fixed fee job.

He was a pretty smart guy, so I am sure he is right.

John

(post #120182, reply #27 of 166)

marc


if you can ballpark within 5% why not hard bid it?

(post #120182, reply #31 of 166)

Scrapr,

Invert the question... Why "hard bid" it ?
What is the benifit ?


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #34 of 166)

as you have run into the banks like hard bids. Golden Rule applies.


 He who has the gold makes the rules. ;-)


everyone knows the parameters. Scope of work clearly defined. Allowance on unknowns.


I think clients are more comfortable with hard bids. Obviously there are clients that either cannot make decisions or are trying to squeeze the last 5% out of the job costs. Sometimes they can win. Some jobs it is better.


Your commercial jobs are probably one of them. But, the sophistication level you are dealing with is much higher than is typical. Full set of plans by an Archy. Everyone knows parameters because it is set out in writing. Even the larger homes probably work good on cost plus a %.


I think in the smaller K&B remodel world a client that is looking for cost plus is looking to save costs on the back of the GC


 


 

(post #120182, reply #38 of 166)

Many clients are more comfortable with hard bids, but not all.

That is true, but that has nothing to do with the tone of the comments coming from the peanut gallery here concerning why do which.

I suspect most who bid Fixed Bid are secretly hoping to keep the majority of their "Contingency " amount and make it a part of the overall profit but won't admit to such a thing.

If not then why not return the unused contingency to the owner?
It was placed in the contract to be used for unforeseen occurrences, not to benefit the contractor as hidden profit.


They can't get your Goat if you don't tell them where it is hidden.

Life is Good

(post #120182, reply #25 of 166)

>>  still comes  down  to  accurately  estimating  your  project  costs  and  duration 


It doesn't really have much to do with estimating costs. It has a LOT to do with estimating the duration, which I do conservatively. In my business there really isn't much overhead that varies as a percentage of total costs. Insurance and business tax are the easy ones to name.