The original estimate from his contractor to do a large, miscellaneous interior remodeling job was $87,000, and it would be done in three months or less. It was Cost Plus because the contractor told him that was the safest way to do contracts.

On April 1 (six weeks ago), the owner sat the contractor down and said he wanted a firm price and a firm time schedule for the work to be completed. At that point, the owner had already made $125,000 in payments and the job had been going for 4-1/2 months. The contractor told him the remaining work would take about $22,000 and he would be done by May 1. In the list of job costs, the owner noticed the contractor is charging for fuel to travel to the job site. Gasoline as a job cost?

It’s the second week in May. The job is still not done, the bills for all work since April 1 have exceeded $25,000 and the contractor says there is an additional amount of at least $15,000 to finish the job.

I can’t give legal advice but I shared a few ideas with the owner on what he should have done, and what he could and should do during the remainder of this job. It’s clear to me that either this contractor is putting the screws to this owner, or the contractor is incompetent. The owner had already told the contractor he can’t come back to the job site. But the owner is allowing one person from the company to come to the job site each day to finish up the job.

The point I want everyone to understand (building owners, contractors and architects) is that a Cost Plus contract is no-win contract. Period, end of conversation. We’ve posted at least 30 reasons that Cost Plus contracts are a problem on our website. We didn’t list claiming gasoline as a job cost – maybe that should be Number 31.

Number 24 on the list is “Cost Plus contracts give the contractor little incentive to get in and get the job done”. This contractor was very careful not to include a completion date on his contract. He was also very careful not to give the owner anything in writing when the owner requested it on April 1.

A construction company can’t operate on an 18% overhead and profit margin. That is nonsense. City, county and state fees, taxes, required licenses, insurances and permits are 6% to 9% of the price of the job all by themselves. How can a contractor pay the remaining overhead bills (like fuel) and make a profit with the balance? The truth is, they can’t. The only way to stay in business while charging an 18% overhead and profit margin is to move overhead expenses into job costs. It’s a game.

Cost plus is the worst possible contract. Many building owners request Cost Plus because they think the job will be done for less. Too often, the money they saved on their project gets spent in legal fees. And when a contractor suggests going the easy route and doing a Cost Plus contract, it should be a warning sign to an owner – why do you want a contractor who cuts corners?

Cost Plus contracts are only good for the legal profession. Ask for, and insist on a fully detailed contract with a fixed price that tells you exactly what you’ll get for that price. No surprises for anyone.

Farmers know and understand that if they want a crop, they have to plant seeds. If they don’t plant, they won’t get a crop. No seeds, no crop. Real simple.

Contractors who are successful in this business know and understand that if they want a crop, they have to plant seeds. The seeds are their marketing and advertising. They are planting seeds when they let others know about their company and the services they provide. If seeds are planted, potential clients will know about the company and know who to call. If the seeds aren’t planted, no one will call. Contractor plants the seed when they advertise, and the client is the crop when they call.

And if you’re planting seeds but not getting a crop, make sure your seeds are good. Maybe you need to make some changes there.

And we all know that when you plant seeds, you have to wait for them to grow. If you want an ongoing crop, year-round, you have to be planting year-round.

Can it get any simpler?

One of the things that caught my eye today was a comment he made about how the media talks about the need for successful companies and/or wealthy individuals to “give back” to society. The underlying message is that companies and individuals who’ve done well did it at the expense of others. For that reason, they should give all or some of their earnings back to society.

Rabbi Lapin and I have the same opinion of that message – Horse Apples. He doesn’t say it that way, but I will. Most of those who prosper financially work darned hard to earn what they have. Most of them are decent, hard working folks who’ve invested massive amounts of time and energy with no promise that their efforts would be successful. Often, they’ve failed before they succeeded, and when they failed, no one offered to pick up the pieces for them.

Is there one media outlet, radio, television or newspaper company that doesn’t want to make a profit? There are some who haven’t made a profit, and they’ve gone out of business. The media is like any other business, if it isn’t profitable, it goes away.

Every business is started by someone who takes a gamble. That kind of gamble requires a great deal of courage, and it’s not always met with success. Those who take the risk and do the work, deserve the reward.

It’s a major celebration for us! The book is updated and revised, covering the same ground as the first version, but also adding in our experiences over the past 14 years working with contractors across the country and in numerous foreign countries. If you want a printed book, this is your last opportunity to purchase the printed book and receive the eBook for free.

If you don’t own an eReader, someday you will. Save the eBook on your computer for when that day arrives. Because the advantages of an eBook are huge. Most tablets have eReader software installed, and so do some smart phones. It’s so easy to open a book and start reading whenever you want (because your tablet or your smart phone is always with you). If you want to look something up without anyone seeing what you’re reading, you want an eBook.

It’s also an advantage for contractors in other countries who are interested in the book. We’ve sold the first edition of “Markup & Profit; A Contractor’s Guide” to business owners in Japan, Australia, New Zealand, Great Britain, Cyprus, Afghanistan and more – we’ve recently had inquiries from Poland and Bosnia-Herzegovina.

It’s been a long haul for us, and now it’s a long haul for a truck driver, but the books are almost here. “Markup & Profit Revisited”

I was reading through a similar magazine for our area the other day, and came across an article talking about EIFS problems and solutions. EIFS is exterior insulation finishing system, and for those of us who live in rainy country, EIFS is to be avoided. I hope most contractors and homeowners in our area know and understand that now.

The writer, however, decided to explain some tricks to ensure homeowners hired the right contractor when replacing their EIFS siding. He said:

There are a few tricks that will ensure you are choosing the right company to replace your siding. Homeowners should request 10 or more references with addresses and phone numbers. It is imperative that you speak with customers who have had an experience with the company that you are considering hiring. This will ensure they’re as good as they are claiming.

Once you have attained 10 or more quality references, demand to know the installation techniques and materials that the company uses to install the siding. Good companies will offer you: graded plywood (not OSB for resheeting), a rain screen system instead of a basic moisture barrier, stainless steel nails that won’t rust, elastomeric caulk guaranteed to last 20 years or more, and high-quality paint guaranteed to last as long as you own your home.

If you know anything about EIFS installation, you’ll know that most of those requirements are going overboard. And show me a painter that will guarantee their paint job for as long as you live in your home. I know folks who have been in their homes for 30 years and more. I had a good friend who just passed away at 92 and he had lived in the same house since 1965. I have a relative who has lived in the same home since 1950.

But this is the part that really got me:

Another point to consider is whether the company you are hiring is subbing out the work to another company. It is meaningless to get a great presentation from a salesperson, only to find that the sub-contractor installing the materials is cutting corners with zero accountability, and has no real knowledge of the product and/or the correct way to install it.

Since when do subs have “zero accountability and no real knowledge of their product”? The reason general contractors hire subs is because they know their work, both the product and the installation, better than a general contractor knows it. They are specialists. And zero accountability? On what planet?

So – advertise in a high end magazine? Think twice. Check out the magazine first, and make sure they don’t hire writers like this one.

But we’ve noticed the same problem with home performance contractors that we’ve seen with other specialties. They believe that because their work is focused on the concept of making a house or home a thermos bottle, their business operates differently. Somehow, the business rules that apply to remodeling contractors or new home builders or electricians or sheetrockers don’t apply to home performance contractors.

Guess what? That’s not true. Regardless of your specialty, the business rules are still the same. You have to charge enough for your work to cover your job costs, pay your overhead, and make a reasonable profit, or you’ll go out of business. Every specialty contractor performs a different trade, and there are many points of differentiation on the building or installation side of their business. But the financial issues are the same.

Now, if you get involved with government agencies or nonprofits, you’ll need to watch your overhead carefully because the paperwork required will definitely push your overhead up. Your profit expectations should be about the same as any other specialty contractor.

The revised and updated book, “Markup and Profit, A Contractor’s Guide Revisited“, is at the printer’s right now, and we’ve more clearly defined what does and doesn’t matter between general and specialty contractors. Check it out – we want to see you succeed.

During the class, a question came up on how to deal with contractors who have let their insurance and sometimes even their licenses expire. “How do you compete with that?” was the question.

Mike’s response – if you suspect the owners are talking to uninsured contractors, suggest to the owner that they should request a copy of their insurance coverage from their insurance agent. Tell the owner not to accept a copy of the insurance certificate from the contractor as they might have stopped making payments on a policy and it might no longer be valid. They need to receive current confirmation directly from the agent. That will give the owner the assurance that the contractor they are hiring is fully insured.

With that, you also need to explain to the owner what their liability could be if the contractor they hire isn’t covered. Accidents can happen on a worksite, and when you explain to the owner that they might be held liable for injuries at their home, or any accidental damage to their home, they will understand the importance of only hiring a licensed and insured contractor.

If I were still building jobs, I would consider asking my agent to send a copy of our insurance coverage to every owner after a sales call. (And offer to pay for that service if necessary.) Make it an automatic event, and tell the owner they’ll receive a copy of your coverage in the next day or so. If the other contractors are operating legitimately, they can provide the same info to the homeowner. If they aren’t, they’ll be put in the awkward position of explaining why they don’t have insurance.

It wasn’t the first sign of problems on the job. The general contractor got behind on starting the job. The government procurement officer gave them a deadline on getting started, and they called my friend in a panic to ask him to start as soon as possible to keep them from losing the contract. He did – and now they are playing games to keep from paying him.

This also leads me to believe that they can’t or couldn’t get their regular subcontractor to work for them because they’ve pulled this baloney before. And I’ll bet they are having money problems. My guess is that they got the job as the lowest bidder, probably at their cost or even below. They are losing their behind, and trying to get the subs to make up the difference.

My advice was to call an attorney and go after the general contractor. Don’t wait a minute, and make sure he includes all costs to collect and his attorney’s fees. In addition I suggested he send a letter or make a visit to the offices of both his Senators and his Representatives. They should know how businesses are being treated on government contracts.

Folks, when a company calls and wants you to start work on a project for them right away because they are in trouble, there might be a good reason they are in trouble. Be careful, find out the facts first. All that glitters is not gold.

And if you end up getting a squeeze like this, make sure you have good documentation and pictures if needed, and go after them immediately. This is a good example of how the scumbags in our industry operate. When you come in contact with them, make noise. Go after them with everything you got. We don’t need these kinds of people in the construction industry.

Accepting that principle as a contractor is a huge step in your development as a business owner. Unless and until you believe that in your heart, you will always be tempted first to worry about your price and secondly to cut your price before you quote the job. Even worse is cutting your price after your initial quote, which in almost all cases will destroy your credibility with your potential customer.

If you have done a good job of estimating the job, and you know what your overhead expenses are and what you want to make as profit on the job, then there simply is no place to cut your quote. Again, until you believe this principle, you will always have that hobgoblin hanging over your shoulder and more often than not, the customer will pick that up. Sales is attitude, attitude and attitude. Your attitude towards your worth and what you should charge for your service will go a long way in determining your success in this business.

Transparency is more than itemized estimates. Generally speaking, when you itemize estimates you provide the price for each portion of a job, and your price includes your markup. There are all kinds of variations on itemized estimates. You can show prices marked-up to cover overhead only, and tag profit at the end as a lump sum. You can show costs on items that can be purchased at Home Depot, and increase your overhead and profit on everything else.

Itemized estimates are created by determining the total sales price you need to cover the estimated job costs and your overhead and profit, then breaking it down in whatever format best protects your business. You have to do this carefully, because the last thing you want is to have the potential client delete those items where you placed your overhead and profit, and keep those items where you quoted cost only. Itemization is really just playing games with the numbers to make a sale. And it’s a game that your potential client stands a better chance of winning than you do.

Transparency is the next step beyond itemization. No games – everything is disclosed.

This was recently discussed on daily5Remodel.com. The conversation started with the premise that homeowners can find all pricing information online anyway. Since they can find it anyway, aren’t we better off disclosing all?

This comment was made:

“I changed my business model because of this (the fact that our clients have access to pricing information). I also changed because it’s very hard to justify a huge markup to a client who doesn’t understand the cost of doing business. I also never felt right/fair about adding 50-75% to a change order because the customer wanted to upgrade their edge detail, for example. In response to the information age I decided to be ‘open book’: The client knows my costs and I charge a project management fee on the original proposal. Some change orders have a management fee and some don’t depending on how much of my resources it took to make the change. If it was that edge detail change, for example, then no markup. The days of hiding costs and protecting information are coming to an end so the sooner we acknowledge that and accommodate it, the more professional (and honest) we will be perceived. IMHO.”

I’d like to address this one piece at a time.

“I changed my business model because of this (the fact that our clients have access to pricing information).”

Well, they can’t find everything online about our business. They can find enough pricing information to make themselves dangerous, but they don’t have a clue what it costs you to tear out their kitchen cabinets or repair the dry rot in their bathroom. They just think they do.

I’ll grant that some of job cost information is available in the form of prices for windows, doors, insulation, cabinets, etc. And, if the potential client is familiar with basic construction, they can tap into various forums and perhaps articles and posts here and there and garner what they may believe is a “fair” way for contractors to price their jobs.

Beyond that, almost all of their judgment or perception about how we price our work is guesswork at best. You tell me, could you get close to the price for your last job by looking on the Internet?

I’ve taught estimating in 44 different states to well over 16,000 contractors over the last 30+ years. In all that time and with all those people, I’ve learned that everyone has their own spin on how to put a project estimate together and as a result, you will almost never get two estimators to come up with the same job costs for a given job. So someone please explain to me, how is a person who is not trained or educated in construction practices going to come up with numbers that are even vaguely close to actual job costs? The truth is they can’t and won’t.

And, as I’ve discussed many times before, you need to base your company’s markup on your overhead and profit needs, which isn’t the same as anyone else’s overhead and profit needs. So how can a potential client know what your markup should be? They can’t.

In fact, based on the failure rate in the construction industry, most contractors don’t know what their markup should be. And many who know what their markup is, don’t use it because they are afraid they won’t make the sale. Because . . .

“. . . it’s very hard to justify a huge markup to a client who doesn’t understand the cost of doing business.”

If, after carefully reviewing your overhead expenses and adding on a reasonable (8%) profit, you calculate a markup of 1.5, 1.6, 1.7, is it huge? No – not if it’s what you legitimately need to charge. You need to calculate a markup that covers your overhead expenses and makes a reasonable profit. If it does that, it’s not unreasonable, and it’s not huge. It’s what you need.

You only have to justify your markup if you tell them what your markup is. Your financial information and your markup are proprietary company information, it’s no one else’s business. It’s especially dangerous in the hands of clients “who don’t understand the cost of doing business.” Let me tell you something: not only do they not understand the cost of doing business, but many of them don’t care. They just want the lowest price and they don’t care what it costs you. Those are clients you don’t want.

“The days of hiding costs and protecting information are coming to an end so the sooner we acknowledge that and accommodate it, the more professional (and honest) we will be perceived.”

The statement that giving out proprietary information makes you appear more professional or honest is, to be polite, horse apples. Does your doctor provide his or her proprietary information before you go in for surgery? If they did, would it help convince you they are a better surgeon? How about your attorney? Do you believe he’ll do a better job of protecting you in the courtroom if you know how much of his rate per hour he takes home and how much he uses to pay for office staff and rent? Why does telling a client all your costs make you a better contractor? I’ll argue that it makes you LESS professional. It shows you’re uncertain of your ability and skills, and that’s why you’re focusing on price.

Price is not the number one priority for most clients. Too many contractors MAKE price the number one priority. They’re hurting themselves, and they’re hurting the industry. Giving potential clients a pile of numbers that they can’t and don’t understand doesn’t inspire confidence. Being apologetic about your price or your method of pricing doesn’t inspire confidence. Clients want to know that you will do the job they want done, in a timely manner at a fair price. They are hiring you to work on their largest financial asset, and need to know you’ll do it right.

The absolutely best comment in this discussion came from someone else:

“Clients don’t want transparency; they want peace of mind. They don’t really want to see behind the curtain, they just want to be certain that we know what we are doing.”

Exactly. Learn how to sell your work, learn how to present yourself, learn how to demonstrate that you will do the job they want done, in a timely manner, at a fair price. Give them peace of mind.