| 1. |
There is no universal definition of Cost Plus or Time &
Material Contracts or billing, thus creating confusion and misunderstandings
almost immediately in any contract. Attorneys practicing law in the same town
will often have different definitions of what is a Cost Plus or Time and
Material Contract. |
| 2. |
Lenders often will not lend on Cost Plus or Time & Material
jobs unless there is a not to exceed clause. When the job goes beyond the not
to exceed clause, you must have written authorization to do that work (signed,
dated and completely priced out change work order) or your customer is not
obligated to pay you for the work. |
| 3. |
Some states now have laws that specifically prohibit the use of
Cost Plus contracts. |
| 4. |
Based on discussions with attorneys, and our work as an
arbitrator, Cost Plus or Time & Material jobs generate lawsuits at a rate
of 2 or 3 to 1 and arbitrations at 9 to 1 over fixed figure contracts. |
| 5. |
Cost Plus or Time & Material contracts are an easy way out of
doing detailed project study and estimating. This increases the chances that
the original "estimate" for work to be done will be low to very low. You risk
accusation of violation of the GOOD FAITH & FAIR DEALING law for "Low
Balling" estimates. An estimate below the actual price will lead to a fight
over money when the real costs start coming in and the customer is requested to
pay more for the job than the original estimate. |
| 6. |
Because of the perception that on Cost Plus or Time & Material
contracts the Owner is required to pay for absolutely everything, many
contractors do not write out change work orders and have the Owner sign them,
falsely believing that they (the contractor) will be paid for all the work that
they may do on that job. |
| 7. |
Owners often go into a Cost Plus contract thinking they have ample
money to cover the job. When the job reaches the 60% to 80% completion point,
and the owners have made multiple changes to the job increasing the cost, they
run out of money. Their claim will be that the contractor overcharged from the
start of the job, and the contractor will be expected to finish the job for the
money that's already been paid. |
| 8. |
For your own protection, you must keep an accurate day to day log
of all labor, materials, sub-contract and other fees or costs on the job to be
able to verify your actual expenses to date. If you do not, depending on your
contract, you may not be able to collect for undocumented expenses, regardless
of what kind of or how much work has been done. |
| 9. |
In addition, you must have in your possession every document from
the job that has incurred a cost. This includes all time cards, invoices, or
any other papers related to the project. If you lose any item, you may not be
paid for it. |
| 10. |
With the need to keep very careful records on the jobs, you
substantially increase the amount of meeting and preparatory time necessary for
the job. Often this time will be 3 to 4 times the amount of time necessary to
complete a fixed figure contract. Cost Plus or Time & Material jobs require
at least two and often three times as many meetings with the customer to review
job progress, billings, invoices, labor, etc. Who pays for the meeting time and
the extra administration time to prep all documents for labor and invoices from
subs and suppliers? |
| 11. |
Who draws the plans and gets the permits on a Cost Plus or Time
& Material job? If a mistake is made on the plans, who pays for the time it
takes to redraw the plans, and who pays to tear out the mistake and rebuild
it? |
| 12. |
Who pays for the Engineering if the Owner forgets to include it on
the plans that they provide, and who pays for your down time while you wait for
these revisions? |
| 13. |
Suppose Engineering on a portion of the job gets by the plans
examiner, the inspector catches the problem, and the job has to shut down until
the engineering is complete and new plans drawn and ready to use. Who pays for
the new plans & delays? Who pays for tearing out the wrong structural work
completed and the materials that are ruined due to tear out? Who pays for the
additional labor needed to correct the problem? Who pays for the down time for
you and your crew, driving time, re-start up time? |
| 14. |
Will the Owner be willing to pay for your travel time to and from
your office for meetings or discussions on problems that might arise on the
job, or from the job site to your suppliers and back to the job site for
material pickup that either they or you forgot? |
| 15. |
If you make a mistake on a Cost Plus or Time & Material job,
who pays for it? Do you donate your time or is the customer willing to pay for
it? Who pays for ruined materials? Who pays to go get the new materials and the
cost of the vehicle expense to do the pickup? |
| 16. |
Who makes up the material lists for jobs with Cost Plus or Time
& Material contracts that are needed before the job starts? If you do, will
you be paid for that time? |
| 17. |
Owners are far more prone to want to furnish some or all of the
materials for their jobs when using a Cost Plus or Time & Material
contract. The Contractor is expected to guarantee those materials when
installed, not to mention losing the markup on those materials. Who pays for
the time to replace defective materials supplied by the owner? |
| 18. |
What happens when the Owner is to supply some of the materials and
they forget to buy a certain item or don't know what materials to bring to the
job site? Who pays to get the forgotten items? What happens if it takes the
owner two or three days (or longer) to get the needed materials to the job
site? What do you and your crews do in the meantime and who pays for that down
time? |
| 19. |
Owner goes to your supplier (with your permission) charges
materials for the job to your account. What happens if you send the owner to a
certain supplier you normally use for materials, they purchase the materials,
and then later claim that they could have purchased the same materials at
another location at a better price? You gave them the higher priced supplier to
go to, so you are responsible for the difference in cost. |
| 20. |
Cost Plus or Time & Material reviews show the Owner what you
are paying for materials. This will increase the probability of complaints from
the customer that they could have bought the same item elsewhere for less
money. It also leads to customer believing they only have to pay the amount
that they could have bought the materials for. |
| 21. |
Owner expects you to be fully productive on their jobs for 8 hours
a day. They will be looking over your shoulder constantly. You will seldom if
ever get the job done as quickly as they are expecting you to do it. Will they
be willing to pay for your State's mandated morning and afternoon breaks for
your employees? Will they be willing to pay for smoke breaks, coffee breaks,
mobile phone time? Will they pay for the time for you or one of your employees
to escort an inspector through the job and answer questions? Who pays for the
labor and materials to do required changes? |
| 22. |
Contractor must be far more diligent in policing employees so that
they are productive on the job at all times, with no miscellaneous discussions
or activities on or about anything other than the job they are working on.
Again, this pertains to starting and quitting times, smoke breaks, coffee
breaks, mobile phone time. |
| 23. |
It is very difficult to "compete" on Cost Plus commercial jobs
because larger construction companies will take these jobs at cost, to build
presence with corporations that allocate the multi-million dollar projects on
assignment basis because of favorable past performance. |
| 24. |
From the customer's standpoint, Cost Plus contracts give the
contractor little incentive to get in and get the job done. Instead, the
contractor's incentive is to keep the clock running, especially if they don't
have the next job lined up. Cost Plus jobs often run far longer than would be
considered normal with a fixed fee contract. |
| 25. |
Owners believe that Cost Plus or Time & Material jobs will cost them less
money to build their job. Therefore they expect you to charge them less money
for the work that you do. ( i.e., less than your normal overhead and profit).
In most cases, Owners believe that you should only make:
Remodeling = 10% Overhead and 5% to 10% Profit
New Home Construction = 10% Overhead and Profit
Specialty Construction = 6% to 10% Overhead and 5% to 10% Profit
This makes it extremely difficult for you to use your established markup on
that job, especially when you have to show them your invoices at the normally
required meetings to review the job progress and expenses to that date.
|
| 26. |
Owners do their homework, put their job out for "Bids" @ Cost Plus
or Time & Material plus 6%, 7% or 8% maximum markup. They tell you if you
don't want to bid that way, don't enter a bid. They also tell you that "You're
not going to make your normal markup on my job!", i.e. take it or leave
it. |
| 27. |
One way many contractors handle Cost Plus or Time and Material
contracts is to take items that are considered overhead and stuff those costs
into the job cost section. In court, a sharp expert witness will find the
overhead items listed under job costs and accuse the contractor of "double
dipping" on the job. This immediately paints the contractor as dishonest,
making a win in court even more difficult if not impossible. |
| 28. |
Most Cost Plus contracts give the Owner the right to either select
the subs for their job from a list supplied by the General Contractor, or the
Owner can hire their own subcontractors that the Owner will supervise during
the job. What happens if subs hired by the Owner don't adhere to the General
Contractor's time schedule? Who is responsible for delays and downtime caused
by their lack of cooperation? What prevents the Owner from suing the contractor
for lack of supervision and other damages caused because the job did not get
done on time? |
| 29. |
When you have subs working on the same project, some hired and
supervised by the General Contractor and some hired and supervised by the
owner, what do you do if there is a scheduling or other conflict on the
project? Who resolves it, how long will it take to resolve? If the General
Contractor is responsible for supervising subs hired and paid by the owner,
will the General Contractor be reimbursed for that responsibility (and
liability)? |
| 30. |
If (for example) a drywall contractor hired by the owner runs a
screw into copper pipe installed by the plumber, who takes responsibility? If
it isn't discovered until water damage appears when the project is complete,
who gets called for the warranty? |
"This estimate does not include unforseeable concerns that may show up during scheduled work.
Concerns will be brought to your attention ASAP, code and safety violations MUST be addressed.
All other concerns are optional at your discretion."
in 7 years i have only had to use this once as a basement suite "clean-up" revealed an entire suite built with 3 foot and shorter scrap lumber and live wiring left loose in the walls all over the place required a full gut and rebuild.
I agree 100% cost plus is nothing but trouble waiting to happen.
I give allowances on certain mechanicals electric x dollars built in to cover unseen wiring changes. "To be billed to customer as per invoice on the contract and the same on plumbing and heating.
Ill build in a close dollar cost and if its over for unseen reasons Ill tell them ist get a change order signed then do the extra work.
However, your setup for the list, the 'two major reasons' that Contractors use them is really missing THE major reason. That reason is the lack of complete, comprehensive, plans and specifications at the start of construction.
The majority of 'Architecturally Designed' plans for a remodel in our area provide just enough information for the Building Dept. to approve a permit. This results in a design that is more concept than detail with the onus on the Owner and Contractor to work out all the details during the construction process, which is VERY inefficient.
Drywall finish? Oak or maple floors? Light fixture schedule? Cabinet style? Countertop material? Backsplash? Casing style? Paint colors? Tile design? Plumbing fixtures? Well, we'll just decide on those when the time comes.
The Owners believe that they have already paid for design because they have a building permit, so, what is the cost of this job?
I don't know, but be sure to 'verify with existing'.