When an owner decides they want a new home, especially if it's a higher-end home, they often start with an architect. They tell the architect what they want in that home, and the architect designs it.
Sometimes the architect knows what the owner's budget is for the home, but their first priority is getting the design the owner wants. When it's time to get the home built, they ask for bids on the project, telling the contractors what they believe the project should cost. That leads to situations like this one:
I have been following your materials on line and listening to your webinars, very helpful. I thought I would reach out for help as I am placing bid on a new home, estimated value at 2.5 million.
The other contractor placing a bid is a union outfit that mainly does commercial work, but have done some fine custom homes in the past. I have followed your guidelines for figuring markup. I removed our labor costs from our overhead, and then figured our labor time at our "burden cost". I will then add all subs, our labor, materials, and other to reach a total job cost, which will be multiplied by 1.26.
The architect would like our bids broken down into categories, such as plumbing, framing, electrical, etc… being that I live in a small town, the Union company I am bidding with is using several of the same subcontractors. So here is my question, should I list each subs cost to me, then show my markup at the end of the bid to reveal my sale price?
If I don't show my markup, and the client takes each line item, adds them up, and sees the actual cost and what I am making sounds risky. My other thought was that I could compute how much I would be making, divided this number up and tack increments onto each category , ie plumbing, electrical, framing, etc… but when the client looks at both bids and sees the union bids it would seem odd to have categories very different, which would cause someone to say "why is this plumbing bid so different, you are both using the same sub?
Any suggestions would be very helpful as this is a huge job. I remember Michael Stone saying that you should never show your markup, does this hold true in this case?
Thank you for your time!
The architect wants a breakdown by category because they have a responsibility to get the project built within the price they've given the homeowner. They'll micro-manage the project, possibly even picking and choosing the subs to get the price down. Of course, if anything goes wrong either on the project or with the schedule, it will be your fault, and your responsibility to fix it.
If the architect can't get the price down to what the owner can afford, they'll redraw the plans and ask for another estimate. This can happen multiple times. Money is wasted and time is lost while the owner waits. It's a negative, ineffective process, and an approach that's set up for discord, delays, added expenses and sometimes failure.
Since the end goal for both the architect and the contractor is a satisfied client, why not look at the whole process differently? How about having the architect and contractor work together from the beginning?
The owner hires a contractor who brings in an architect. Or, the owner hires an architect who brings in a contractor. The owner explains what they want in the home, and they set the budget for the job. From the beginning, the contractor and architect work to design the home the owner wants within their budget. They adjust the owner's expectations if their desires are beyond the budget. When the plans are drawn from the beginning to get the owner the home they want within the budget they can afford, everyone wins. The home can be started and completed on budget, on time, and with the least amount of dispute.
That won't help in this situation. When you're already in a spot where you're asked to bid on a project by an architect who wants to know your numbers, the first thing to do is ask them why they need to know. Explain that the only number that counts is the final price, your quote for the job. If they want to take something out of your quote because they think they can get it done cheaper by someone else, then you'll re-estimate the job.
If you decide to play their game, I wouldn't disclose my costs directly. We discuss how to present a quote in this situation in Chapter 12 of Markup & Profit Revisited under the subheading "Job Cost Adjuster".
The best way to look at business, whether you're an architect or a contractor, is to view things from the other point of view. Contractors and architects shouldn't be adversaries; they should be working together and trusting each other as professionals. That's how you build a project where everyone wins, including the client.