What's the difference between final price and total cost?

If the total cost of material and labor is $500,000, is the builder's fee $75,000 (15% of 500,000) or is it $88,235.29 (15% of 588,235.29 being 88,235.29 and 85% being 500,000)?

Total cost. Make sure contract clearly indicates.

@dadereni - Hmmm. My quote indicates 85% of the total cost for material and labor and 15% cost plus margin (not sure what margin means). In effect, it says for every 100 dollars I am paying, 85 dollars is going towards the house and 15 dollars for GC. As opposed to for every 115 dollars I am spending, 100 dollars going towards the house and 15 dollars to the GC (this would be more beneficial to me).
Need input from others who have experience with cost plus.

This post was edited by hawkeye2256 on Sat, Mar 9, 13 at 8:38

Bottom line question is this - Is builder's fee margin or markup?

I find your description continually confusing. Builders typically have a mark-up for overhead/administration and another mark-up for profit (margin). Every builder is different, but 15% + 15% is one possibility.

Can you quote what your contract says, rather than trying to summarize it in your own terms?

@virgilcarter - Sorry for the confusion. I haven't signed a contract yet but got a detailed quote including builder's fee at a flat 15%. Total (including construction costs/labor and builder's fee) is 560,000. Of this, builder's fee is 84,000 (15% of 560,000) and construction/labor costs are 476,000. Shouldn't the fee be 15% of 476,000? Hope that helps.

I agree that I would say that the builder's fee in that case would be more accurately described as 17.6%, but I don't think I'd reject the quote based on that exclusively. What's important is that you know what you will be charged and you're ok with it, not exactly what the details are.

This sounds like a lump sum, not to exceed price of $560,000 including the builder's fee. Is this correct? If so, all you should care about is the $560,000. If that is acceptable, his fee is irrelevant.

That said, your contract should also specifically itemize the method of payment and builder's mark-up for:
--change orders approved by the owner;
--allowances

Allowances are an area where there is often great misunderstand, with builders often low-balling the allowance amounts. You should ensure that amounts for allowances, if any, meet your expectatons, and the contract should be specific about the contractor's installation of these and any other owner-furnished items such as kitchen applicances.

Finally, you should budget a contingency fee of perahps 10% +/- for the predictable change orders and other "surprises" that occur during construction.

Good luck on your project.

@virgilcarter - Thanks. Yes, it is lump sum in the sense that is not going to be more than 560,000. However, if it is any less than that (and I do plan to cut back), builder's fee will decrease by 15% of that amount.

I think I have reasonable allowances and am aware of 10% contingency budget.

What's a 'normal' markup for change order approved by owner?

What's a 'normal'

Cost-plus in my area runs 22%+. I once had a client on a fixed-price contract who insisted that all his extras be added at my cost. Without a clause in the contract covering that, I let the trades give him their quote, then later rebate me my trade allowance.

(Anybody who thinks they're going to squeeze all the profit out of the builder's hands is usually kidding themselves.)

Most builders have a fee for overhead/administration and another (often matching) fee for profit, i.e., 12% + 12%. This normally applies to change orders and may also apply to charges approved by the owner for purchases and installation above the allowance specified in the contract.

Thus, it's important to have a detailed discussion with the builder, and to have all terms in writing in the agreement before proceeding--particularly for change orders and allowances.

One should pay attention to the information Worthy shared. Few owners are going to beat an experienced builder at his own game. Thus, a fair and mutually agreeable detailed contract is the best course of action for everyone.

@worthy, @virgilcarter - Great advice. And that's all I am looking for - have a mutually agreeable contract. Trust and not money is the reason why I chose this builder. In fact, he was not the lowest of the bids. Will update in the near future. Thanks.

@hawkeye2256 I'd be careful in signing that contract if you truly don't understand exactly what you are being charged for. It does not sound like a lump sum contract from you last post. I am a licensed General Contractor.

There are (3) main types of contracts out there.

1. Lump Sum (Or Fixed-Price) Meaning you are agreeing to pay that General total amount of "X" for your project. With a lump sum the GC can do anything he wants to reduce costs as long as you receive everything on your drawings and in your contract.

2. Negotiated Fee (Or Cost-Plus) Meaning you pay an additional "x" % on total of the material and labor costs. A Builder's Fee is not usually the same as his markup, if you are paying 15% on top of materials, labor, and builder's fee. A builder's fee is the labor he puts into managing your project, the administration, scheduling the subcontractors, etc. For instance, I have General Conditions (i.e. site supervision, project administration, temporary toilets - everything it takes to run the job excluding the people building the project and the material), than I have overhead ( which should be the same as a builder's fee) which is his cost to keep the lights on in his office, to keep his insurance and bond up, etc (to keep his company running - that doesn't not come out of profit) this is normally called "Overhead"; And lastly there is profit, just like you pay everytime you buy toothpaste, or a latte. Every business needs to be making more money than it puts out, or it wont be around very long.

3. Lastly, there is a "Not-To-Exceed" Contract, which is what yours sounds like. Typically this is a cap that a GC will put on the costs of a job. I've never done one for a ground up house or major remodel. Thats pretty risky. Especially with the cost plus aspect of it too. A not to exceed wont be me telling you it wont cost more than $500k to build your house period. And then if it comes in at $450k you keep the remaining $50k. If it costs $510k, the builder eats it. (Same with a lump sum bid, except if the builder charges you $500k and only spends $300k, he keeps the remaining $200k.) I hope you sought legal advice or advice from an outside contractor.

Well, I hope this was educational. Let me know if you have any questions. I truly hope your project is successful.

N.K.
Hero Construction Co.

The term "Cost Plus" is typical contractor shorthand for a "Cost of the Work Plus a Fee" contract.

The Fee can be a fixed amount or a percentage of the Cost of the Work. Apparently, in this case, the Fee is established as 15% of the Cost of the Work. This is therefore not a Lump Sum contract.

It is also possible for such a contract to stipulate a Guaranteed Maximum Price so the contractor would not be able to bill above that amount.

It is difficult to be sure of the basis of the contractor's compensation without being able to read the contract since your description is unclear and possibly contradictory. You need to show it to a professional who understands contracts and represent you, not the contractor.

A construction contract is an agreement so both parties must be entirely satisfied with the terms before signing it.

This post was edited by Renovator8 on Sat, Mar 16, 13 at 23:41