We often hear of home or building owners claiming that contractors overcharged them for work
being done on fixed figure (lump sum) contracts. The claim is usually that the "construction
industry standard" is Cost plus 10%.
Let's be clear here, there is no such industry standard. There never has been and there
never will be. If you have read our book "Markup and
Profit; A Contractor's Guide", you know that few contractors can operate a business and
breakeven at cost plus 10%, let alone make a profit. The idea that a contractor can survive at
a low markup defies the mathematics of basic business and common sense.
Our belief is that this "industry standard" of cost plus 10% was created by architects. At
some point, an architect put a limit in their specifications of cost plus 10% on the amount the
contractor could charge the home or building owner. The reason for the limit was to help the
architect or designer look good to the building or home owner. In short, they helped "save" the
owner some money.
That grand idea was passed along to other architects, and first thing you know it is
cropping up all over the country.
I have talked with several contractors about this and some have been badly burned by these
specifications.
Even worse is the recent ploy of putting specs into a job that limit change orders to COST
ONLY. No overhead and profit margins are allowed. The contractor is somehow supposed to extract
any money they need for overhead and profit from the original contract amount.
How do you combat this nonsense? Here is my best advice:
Don't take any jobs where the someone else tries to tell you how much you can charge for
your work. (This includes architects, engineers, owners, government entities, insurance
companies or commercial companies.) Your price is your decision alone. If all contractors would
stick to this rule, this nonsense would go away because companies that try and dictate what
contractors can charge simply couldn't get their jobs built.
If anyone claims you are overcharging, tell them to put together their own estimate, in
writing, on what the costs are, and what they feel are adequate overhead and profit margins for
a construction company to build that job. In many cases you will find that they will drop the
claim because they are throwing nonsense at you to see if it will stick. If they do in fact put
together numbers for you, it should be very easy to find what they've missed. They will not
have adequate numbers in their "estimate" to cover overhead for any company, and the same would
hold for profit. A quick check of most government required fees for contractors in the form of
licenses, bonds, insurance, etc., that are heaped on us will exceed the 10% figure alone.
If you run into an architect or designer that puts these limits in a plan, tell them, in a
nice way, to draw plans and stay out of the business of telling you what you can or should
charge for your work. Plain and simple, they do not know. By the way, the architects and
designers that are putting these Cost or Cost + 10% figures on their specs are charging their
customers far more than cost plus 10%.
If you have a case where you are not sure how to handle the claim, send me an e-mail and we
can talk about it. If we need to talk on the phone, we can decide that after you have sent
along the facts of your case.
And remember to read the specs on every job before you decide to get involved. It's the
small print that carries the surprises.
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Thank you for your interest, we look forward to working with you.
am in nigeria, west africa.
I also have to comment on "simply trying to keep cost down for the client". The cost of the project is determined by the design, and if it costs too much, the problem is the design or the selections, it isn't the pricing method you use. You are in business to provide a service and make a profit doing it. If your focus is saving money for the customer at your expense, you won't last long.
So let's see, they spent a whole lot of time in air-conditioned environments learning to draw pictures of buildings that are allegedly constructable by qualified yet albeit underpaid contractors. I don't recall anything in the architect's job description that qualifies them to set prices for anything a contractor would do.
Maybe I'm jaded because I work for a living, and have had occasion to deal with MANY high-priced yet flawed architecturally engineered projects.