"I don't know if I can accurately give you a set price on this, how do you feel about a cost + situation here?" You may have heard a contractor suggest this billing structure before.. It may have been poorly implemented, never explained properly, causing some uncertainty and stress during a renovation. Or... it may have gone wonderfully, and as a contractor/client you are constantly chasing the dragon on how that project went so clean... Fear not, this post will dissect the cost + materials billing structure, surfacing its pros and a few cons, so that both clients and contractors have a better understanding of it.
What is a cost + job...? Cost +, refers to a billing structure during a renovation. It is defined as "the cost of labor + the cost of materials/sub trades/permits etc... after markup."- me. This means a contractor is to provide you with an hourly rate, $65 hr, a markup on things purchased, 20%, and their GST rate, 5%....Grab a coffee, and hold on, things are about to get dicey.... A contractor works 1 hr and buys 1 piece of wood for $10... They bill the client... 10x1.15=$11.15 (the wood after markup.) 1 hr of work = $65... 65+11.15= $76.15. Don't forget GST (5%)... 76.15x1.05= $79.96.... Billed to client = $79.96.. If you just got a strange flashback to zoning out in math class and having the teacher call on you for the answer... Its ok.
I feel like there might be someone thinking, "well how do I know they spent that much on wood, and were actually working a full hour!?" Brace yourself for the next paragraph my friend...
DOCUMENTATION..... Yes, all caps. This is the beginning of all effective and efficient elements to a successful renovation. This is a separate post on its own, so ill continue. Prior to starting the project, a ballpark price can be given. This is simply a gauge price, usually a conservative maximum for the project. With the billing, the contractor will supply you with some form of receipts for materials and other costs. If you don't wish to receive these receipts it is always nice for you to communicate that, as it saves contractors quite a bit of time creating copies of these. If there is something in question, copies are kept for review. As for the hourly documentation... a contractor needs to be keeping a log of hours. How specific this log is varies. So yes, there will be some trust and integrity involved with this. As a rule of thumb, go by 30 minute rounding. What that means is if you are there for 40 mins, round it up to 1hr, if you are there 20 mins, round it up to 30mins (put this in your contract before starting). If you don't trust your contractor, or the contractor does not trust the client, I don't think cost + is necessarily the best billing structure for you (see future blog on set price billing structure).
Pros of Cost +. This structure has more pros than cons as it eliminates risk on both parties involved. It is safer for the contractor, so the project is often done cheaper overall. When giving a set price, a contractor must charge for unforeseen risks that may occur during the project. If these risks do not occur, the price does not go down because the contractor is taking the risk. There are some arguments that it produces higher quality work as there is less of a time crunch. Another pro, is that this structure streamlines start dates, as there is less process involved with producing bids. It is also easier in implementing change orders to the scope, as new pricing does not need to be sent, the project simply continues on an hourly basis. One of the biggest pros for this structure, is that you are hiring skilled workers who can produce faster than the average person. It removes the cost per foot pricing that often contractors thrive off, so try to not be too critical of the hourly wage agreed on.
Cons. I am going to keep this one fairly short, as there are few cons in my opinion of this model. If you don't have your numbers in order of what you need to charge as a contractor, this model can sometimes lead businesses into financial struggle. Make sure in your hourly wage you have the costs of your overhead, expenses, and profit built in. Another con, is this form requires communication between contractor and client more than others. Keep the the lines of communication open, so that you remain on the same page throughout the project. The final con, is this structure requires organization. If you loose receipts or fail to keep track of your hours properly, you will find yourself in some awkward situations. Innovate a process that works for you and the homeowner to make this work. Software such as Excel, QuickBooks, and QuickBooks Time
are tools I personally find helpful to keep projects squared away.
I hope this was helpful... stay tuned for future blog on a set price billing structure.