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Cost +10%

Cost +10% (post #193826)

baronbigdog on Sun, 09/26/2010 - 08:09 (updated 09/26/10 - 09:40)

Business

I have a question concerning our contractors fees. We are completing a renovation after a major water leak. Our agreement with our contractor was to complete the job at cost +10%. This is an insurance claim and we have made many upgrades to the house beyond what the insurance company is paying for. In order to help pay for the upgrades I am completing most of the finish work myself, flooring, trim, painting, etc.

Our contractor is telling us that we owe him the additional 10% even though I am doing the work myself. As if I am his sub.

Is this normal? This seems unreasonable to me, but this is the first time we have gone through a major renovation like this.

Thanks.

Did you in the beginning of this contract........ (post #193826, reply #1 of 22)

by calvin in reply to baronbigdog [original] on Sun, 09/26/2010 - 08:42

agree to a cost plus 10% on the total scope of work?

was the idea that you would be completing the finish?

While I agree, you might have recourse to renegotiate the contract-I as a contractor would certainly have liked to have known our total relationship from the get go.

Further, depending on the magnitude of this work, are the permits pulled by you or the contractor?

A Great Place for Information, Comraderie, and a Sucker Punch.

Remodeling Contractor just outside the Glass City.

http://www.quittintime.com/

Cost + 10% means he is (post #193826, reply #2 of 22)

by mordecai in reply to baronbigdog [original] on Sun, 09/26/2010 - 09:25

Cost + 10% means he is reimbursed for costs + 10%. Are you getting paid for what you do? If so, he is entitled to reimbursement for the cost of paying you. If you are not getting paid, then 10% of zero is zero.

This makes (post #193826, reply #4 of 22)

by Tim in reply to mordecai [original] on Thu, 10/07/2010 - 05:45

the most sense. Costs are documented with invoices and labor records. 10% would be due on materials provided by the contractor, but not on the "free" labor.

It seems like everyone here (post #193826, reply #5 of 22)

by McMarky in reply to mordecai [original] on Thu, 10/07/2010 - 08:44

It seems like everyone here is of the opinion that the GC does not incur any costs when the HO does some work themselves. This is wrong. On a T&M or Cost Plus contract, a portion of the time, cost and profit are apportioned to project management and scheduling. When you take on part of the job yourself, you have removed his ability to recoup for his project management associated with this sub's scope. But even though he is not getting paid for it, you, the job, the other subs and his own set of ethics demand that he continues to PM the entire job.

And unless your skills and construction knowledge is top notch, the GC is probably doing more PM tasks when you paint and do other finishes, then when his trusted subs do these tasks.

This should have been brought up earlier, but for this you are both guilty. I would think that his cumulative 10% is not really that high, and that you should willingly pay it. In my view, otherwise you are into his pocket and are being exceedingly parsimonious

I agree, more or less. It's (post #193826, reply #6 of 22)

by DanH in reply to McMarky [original] on Thu, 10/07/2010 - 15:57

I agree, more or less. It's not clear what tasks the OP is doing and how they intersect with what the contractor is doing, so it's hard to say whether the burden on the contractor is more or less than a regular paid employee or sub, but there is a burden.

Which is why I suggested a compromise at 5%.

We are like tenant farmers chopping down the fence around our house for fuel when we should be using Nature's inexhaustible sources of energy -- sun, wind and tide. ... I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that. --Thomas Edison

Then the contractor should (post #193826, reply #10 of 22)

by mordecai in reply to McMarky [original] on Sun, 10/17/2010 - 06:29

Then the contractor should have done cost plus a fixed fee.

Of course, we don't know when (post #193826, reply #11 of 22)

by DanH in reply to mordecai [original] on Sun, 10/17/2010 - 06:32

Of course, we don't know when the OP sprung "I'm going to do some of the work myself" on the contractor.

This is a kind of a paradox. (post #193826, reply #3 of 22)

by DanH in reply to baronbigdog [original] on Sun, 09/26/2010 - 10:27

This is a kind of a paradox. Viewed from one angle he's right, from another you are. The detailed wording of the contract could be a factor, plus how your part of the work is being done: Is it essentially after he leaves, or in the middle of his work? Does any of your work figure into the inspections? Was it agreed from the start that you would do part of the work, or did this come up during the project?

I'm kinda thinking that both sides should be happy with 5% for your work, unless you're getting in his way somehow.

I hate cost plus (post #193826, reply #7 of 22)

by MarkDMacLeod in reply to baronbigdog [original] on Thu, 10/14/2010 - 07:30

I hate cost plus arrangements. We've just completed a project with this and it was a total disappointment. Why doesn't it work?

1. It removes a necessary check and balance in the relationship about costs. If the project has a known cost and something is asked for or specified that magnifies the cost, the builder will naturally talk to everyone about how to manage that. In a cost plus arrangement there is NO incentive to control costs, in fact there is a perverse incentive to not manage costs - either labour or materials - bc it puts more money in the contractors pocket. Example - the bathroom fixtures were quoted by the plumber for our project at 11K - I did 1.5 hours of work on the internet and sourced for 50 percent. It was in my interest to reduce the cost, it was in the contractors interest to maximize cost.

2. It removes the need for an accurate bid/estiimate bc as soon as the shovel hits the ground, the bid/estimate is meaningless - and the contractor has assurance of cost plus 10 percent. I have experience of both - contacts where the cost was the cost and when I knew the cost was greater, that contractor said "my quote is my quote, if I can't do a proper estimate after 30 years, that's my problem - I have a reputation and it's why I get this kind of business".

Cost plus is a recipe for disaster. I'll never do it again.

OTOH, with many complex (post #193826, reply #8 of 22)

by DanH in reply to MarkDMacLeod [original] on Thu, 10/14/2010 - 15:37

OTOH, with many complex projects it's impractical to not include some "cost plus" aspect in the contract. Otherwise every new "discovery" about the foundation or the plumbing or whatnot is going to require renegotiation of the contract.

It's a pity it didn't work for you. (post #193826, reply #9 of 22)

by calvin in reply to MarkDMacLeod [original] on Thu, 10/14/2010 - 16:20

My business is pretty much all cost plus. I work on referral only and provide a spread price for the customer so there is a useful number to use to forsee the cost of the project. I have had no complaints.

A Great Place for Information, Comraderie, and a Sucker Punch.

Remodeling Contractor just outside the Glass City.

http://www.quittintime.com/

Question? If you sourced your (post #193826, reply #12 of 22)

by mordecai in reply to MarkDMacLeod [original] on Sun, 10/17/2010 - 07:01

Question? If you sourced your own materials and saved money, then why did you not do the same for labor? It seems that what you are wanting is to go to some person who is not going to perform labor or supply materials and ask him how much the total cost of the project will be. In other words, his price includes the cost of labor and materials. Suppose I said to you that I would go to a vendor to purchase 10 gallons of paint for $700.00 and included in that price is the cost of the paint. How much of that is for paint? You, of course, want the finest, most expensive paint money can buy. Suppose that is $125.00 per gallon. That means that $1,250.00 of that $700.00 is for paint. What if I come back with a lesser quality of paint that cost $25.00 per gallon for a total of $250.00. You did not get what you wanted and I kept $1,000.00 of what should have went to the vendor. Now what?

No, you missed my point. I (post #193826, reply #13 of 22)

by MarkDMacLeod in reply to mordecai [original] on Sun, 10/17/2010 - 07:15

No, you missed my point. I want everyone who works for me to spend my money like they earned it. An old Italian saying - "no one spends your money like you do". There's truth in that. What I wanted and want is to pay a fair price - I'm wiling for the contractor to spend the 1.5 hours that I spent on the internet to source the materials. I'll pay him at the agreed rate - and I still would have saved 5000 dollars.

Cost plus ONLY protects the builder. It's specious really, it takes all onus of the builder to be a participant in the fiscal responsibilities of the project.

Specifically , in response to your post, if we agreed on a type of paint which we would have - you don't have the option to substitute a lesser or better QUALITY of paint. However, if you can find it for me at 50 dollars a gallon but your buddy sells it for 60 dollars for a gallon, and you buy from your buddy, in essence you and your friend are stealing 10 dollars plus 10 percent. It's that simple.

Like other states, the lien (post #193826, reply #14 of 22)

by mordecai in reply to MarkDMacLeod [original] on Sun, 10/17/2010 - 08:31

Like other states, the lien laws in the state where I live state that all contractors and subcontractors are agents of the property owner and that the owner is liable for the acts of his agent. This being the case, how can any contract of a contractor or subcontractor be anything other than cost plus?

I can accept that - so then a (post #193826, reply #15 of 22)

by MarkDMacLeod in reply to mordecai [original] on Sun, 10/17/2010 - 09:00

I can accept that - so then a question - how can a cost plus contract be structured so that it is not a blank check for the contractor? How can a contract be structured such that risk in the project is shared and there is full accountability and transparency?

Why would you ever deal with (post #193826, reply #16 of 22)

by DanH in reply to MarkDMacLeod [original] on Sun, 10/17/2010 - 11:13

Why would you ever deal with a contractor you didn't trust?

With whom would risk be (post #193826, reply #17 of 22)

by mordecai in reply to MarkDMacLeod [original] on Sun, 10/17/2010 - 16:35

With whom would risk be shared? As an agent, the contractor is accountable, as are subcontractors. In the state where I live, transparency is the law. Here, a trade contractor (carpentry, plumbing, painting, etc.) must furnish labor, material, and equipment bills and invoices from those suppliers in order to be reimbursed. By law, the property owner has fourteen days to dispute any bill or invoice. If no objection is made in writing, then the statutory law says the bill or invoice is certified and approved. The best thing a property owner can do is make the contracts of all contractors and subcontractors on a cost plus fixed fee basis.

Here's the thing.... (post #193826, reply #19 of 22)

by davidmeiland in reply to MarkDMacLeod [original] on Tue, 10/19/2010 - 22:19

how can a cost plus contract be structured so that it is not a blank check for the contractor?

One of the reasons for going cost-plus is that it's a blank check for the owner, and that's what they want. Many people want their projects started before they've made all of their decisions about what will be done, what materials will be used, and so on. Many people like their projects to proceed organically, i.e. they look at things as they're developing and make changes, additions, deletions, etc. Virtually every contractor who works for relatively affluent owners is familiar with the job that started as a modest kitchen update and turned into a gut-remodel of the whole house. The final cost of projects like this is not known until the work is complete.

As a contractor, I can bid accurately on your plans if you give them to me with enough information. Suppose we start with a job at $100,000. I give you a list of allowances for finishes. During the project you exceed every allowance, adding a total of $15,000 to the job. Then, you request additional work that was never part of the original scope, adding another $35,000 to the job. And, we find some problems with existing structure that require another $10,000. We end up with a job at $160,000. You went into it thinking it would be $100K, but it ended up a lot higher. That's pretty much exactly what would have happened with cost-plus, but you would feel like there was a lot more control, because during the process gave you a change order for every single increase, before we proceeded with it.

I remember your comments on another thread. The problem you had was not that you gave the contractor a blank check, but that you hired the wrong guy. He was either lazy in preparing the cost estimate, or unscrupulous, or both. Like a lot of guys here, I do a ton of cost plus work, and I can defend every single cost I bring you. You can take a bill that I paid for something, show it to a roomful of other good contractors, ask them if it's reasonable, and they will say yes. You can a stack of timesheets for work that we did... same thing. The last thing I want is to have the cost run out of control. It is far better to have everything come in at a reasonable number. That way you'll tell all your friends to hire me.

cost plus (post #193826, reply #18 of 22)

by reisco1 in reply to baronbigdog [original] on Mon, 10/18/2010 - 18:55

We have done many higher end jobs were we have done cost plus. If your contractor is not showing you the invoices for the items then may be when you pick the stuff out you should try looking at the price tag to see how much it will cost. The price of the project in this set up is ultimately up to the customer, we have our customers pay in installments as the project progresses they get a copy of every invoice for all labour and material.

References are always a good way to find out how other customers liked this method of payment.

Large renos are almost impossible to give a firm quote because you never know what you're going to get into when you start opening things up. For that reason cost plus is a good method of payment

Always get references,

Thanks for all of the (post #193826, reply #20 of 22)

by MarkDMacLeod in reply to baronbigdog [original] on Wed, 10/20/2010 - 08:21

Thanks for all of the feedback and I take all of your comments seriously. I think your assessments are right - we hired the wrong contractor. We wanted someone who would communicate with us. My partner preferred the communication of this person and it turned out to be wrong. My first choice was the guy who reminded me of my grandfather - fewer words but impeccable quality and seemd simply "to know". So I accept responsibility for that choice.

The contractor didn't act as our agent and was neither transparent or accountable. No contract can fix or prevent bad behaviour. That's why he wont' be back.

One side note - the project was FULLY spec'd before we started - down to the last door handle, shelf, and the towel hook. There was one VERY VERY expensive change after - the wall design and material. So having an electrical estimate out by a factor of 5 is not acceptable. The bigt wall change should have prompted a call - Bill and I would have then had a chance to stop the project or consider other wall construct options. We didn't get that call.

As far as the "trust" component - you get trust by relationship - and how do you know what a contractor is really like until you work with them. Gvien that most of us will do a house build once or twice in our lives, there is no opportunity for trust. As far as references, interviews etc - well I don't place a lot of stock in them and am more convinced now. References will be for happy people - (we won't be asked for one I would wager) and people want to tell how good their new experience was (ever heard someone say I just bought a new car and it's a piece of crap). So the whole thing is a challenge.

I admire those of you who take this seriously. Our contractor didn't and has cost us grief, money, time, and pleasure. I'm only too happy to tell others about it. If you do value this, guard it like a jealous mistress - credibility and reputation are your most important assets.

References (post #193826, reply #21 of 22)

by davidmeiland in reply to MarkDMacLeod [original] on Wed, 10/20/2010 - 13:34

If you ask a contractor for references you might very well get the best people he can give you.

If you ask your friends, neighbors, lawyer, banker, accountant, architect, and others for references to contractors, a few names often pop up repeatedly, and you start talking to those few.

On the rare occasions that people ask me for references, I give them a list of everyone I have worked for in the past year. In a small town like this they will know someone (or more than one) on the list, and will call them.

There is one guy I leave off my list. I did an impeccable job for him on a fixed price contract, and he had to be reminded to pay me. He would badmouth me... and ya know what, if anyone asked I would badmouth him too, chiseler that he is.

Costs (post #193826, reply #22 of 22)

by BobR71 in reply to baronbigdog [original] on Mon, 11/08/2010 - 08:12

It sounds like this should have been discussed earlier on in the project. The contractor charging you the 10% is fair. I normally charge 20% and the reason that I would charge you is because even though you are doing the work and it is your house it is his project, his insurance, etc. I am assuming he still needs to coordinate other subs around you, clean up, etc. There is a lot of time and effort a contractor puts into running a job and they need to charge for that. I don't know what part of the country you are in but here in New York area, my insurance rates are ridiculous. I need to be insured for everything: liability, workers comp, auto, disability, and as the GC my insurance needs to cover all my subs just in case, the clients, decorators, etc. My overhead costs are insane. So the only way I would let a homeowner work on their own house would be after our contract has ended and all my permits are closed. It is just too risky. BUT, I do explain all of this verbally and in writing to the clients from the get go.

Good luck