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Building a Home

Fixed Fee Cost under a Cost Plus Fixed Fee Contract?

13 years ago

What fixed fee cost or % of profit out of total construction cost have your builders (or any potential builders you have talked to) quoted you under a cost plus fixed fee contract? Will be helpful if you have also included total cost of construction and total sq footage. Thank you.

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Comments (6)

david_cary
13 years ago
This has come up many times. Seems like you get as low as 8% and up to 20%. It depends greatly on your local market.

I personally think that builders at 8 and 10% are probably making some extra money elsewhere.

I've also seen builders have a fixed fee or %age plus and then charge an hourly rate for their supervisor. Total crap but I've seen it and that was on top of an 18% fee.

I paid 80k with a 540k cost on a 4000+unfinished basement. The problem with using that as a comparison is that in some markets that might be a basic house and in some it might be completely custom with far more complexity than a basic house.

I am getting ready to pay a higher percentage to build in a more challenging area. In my mind I can justify that because it is a smaller house but more complicated at the same time.
topman
Original Author
13 years ago
Thanks david_cary. I think in order to collect more information data or ballpark number, it will be helpful if anyone responding will also classify whether they are building a higher end custom home, an above average one or an average one etc in their area.
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Is it a negotiated Fixed Fee based on an estimate of cost or will it be determined as you proceed at 7% of the actual cost? How complete are the drawings? Have you done this before? Are there any allowances or undefined design elements? Has the builder already contacted his favorite subs for estimates without competitive bidding? Will there be any markup for any of the Cost of the Work? Will you be on the site every day? Is there a design professional involved to review the costs and the progress of the work? The cost of the job will be dictated in a large part by the prices the GC accepts from the subs so it is important to determine how that will happen. Who will select the sub contractors for bidding and who will choose the winning sub? Will you be involved? Paying the subs directly means you will, in a sense, be acting as the GC with this guy acting as a Construction Manager even if he does some of the work. Being a GC normally means you take the construction risk; a CM normally does not. What portion of the work will he do with his own forces? Does he own his own truck? (sorry, irresistible old joke) What is the advantage of paying the subs directly other than to relieve him of liability for their performance? A Cost of the Work contract is not simple; there are very many important variables to resolve before the contract is signed. Did he write the contract or is he using a form?
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My understanding of a "cost plus fixed fee" owner-contractor agreement is that there's no maximum building expense stipulated in the agreement. The "cost" is whatever it costs to build what you have agreed to build, plus the contractor's fixed fee for all materials, products and labor that's s/he furnishes as part of the building contract. Who selects subcontractors, materials and products? More importantly, who pays for them? In other words, who decides what the expenses will be? This type of contract is appropriate if the scope of the work is unknown (or unknowable), and/or changing over time. It transfers all the contractor's risk to the owner. And it allows the contractor to control the building schedule and progress as s/he may choose. Thus the owner must do a lot of early due diligence and spend a lot of regular, repetitive and timely contract administration each week in order to know what's taking place and the costs to date, projecting total expense at substantial occupancy. If you pay the bills as presented by the contractor you have to decide if they are correct and appropriate before paying. If the contractor pays the bills and then invoices you after the fact, there's little you can manage after the fact. Be sure you receive a Release of Liens at the end of construction, which certifies that the contractor has paid in full all subcontractors and suppliers. Good luck on your project.
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I like to use a Cost of the Work contract with a Guaranteed Maximum Price and a Shared Savings. This is pretty much the standard for large commercial projects since the early 70's. Each trade is bid competitively and the owner chooses the sub and if that price is greater than the lowest one, the GMP is increased by the difference. The owner has cost protection and a chance to save money and the builder has a financial incentive to buy the job out below the GMP. Splitting the savings increases the builder's profit with little effort and no additional cost. I've never found a downside to it. It is usually a good idea to have an architect involved unless the builder is sophisticated enough to administrate the contract. I would avoid any allowances in fixed price contracts or any Cost of the Work contracts with no GMP because you have no cost protection against excessive markups by sub contractors.
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Vegiegardnr- Did you talk to you flooring person about thier hours? Not that it really should need to be any of your concern what it takes to run their business as long as you get the finished product that you are paying for (and of a reasonable quality), but there probably is a lot more to it than you seem to assume. You saw work from 10:30 -4:30 and decided that was lazy. There could have been other work that is necessary to their job that was happening during those "lazy off hours": Meeting other potential clients for quoting work, billing and paperwork for jobs done, billing and paperwork to pay supplier accounts, getting quotes or filling out forms for insurance and/or licensing, filling out forms for employees or past employees that need employment verifications for loans/apartment renting/new jobs, picking up materials for jobs or tool expendables, servicing of their truck or equipment that they use to do the work, researching and/or buying a new piece of equipment, going to a class about a new floor surfacing product, etc.. Based on how you present yourself here it seems you don't view contractors as human beings that "just might" be working hard to try to do good work. There are bad guys out there in all fields of work, but most contractors do not deserve the assumption that they are all just trying to find ways to overcharge and be lazy. Or maybe in your experience those are the only ones you've worked with - because as others have pointed out, contractors look at their potential clients in terms of risk of loss/stress/hassle/not getting paid/not getting sued, and the good self respecting contractors who have a good reputation and referral base don't need to take on risky/unpleasant work and probably steer clear of working with someone with those attitudes. Maybe next time - still protect yourself with reasonable due diligence, but treat the contractor as a human, ask (a reasonable amount) of polite and non judgemental questions if you don't understand where charges come from or why things cost what they do. Maybe then you'll have a better experience with your next contractor and start to shift your views away from assuming they're all bad.
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baron3
13 years ago
We built using a cost plus fixed fee contract in '09. Since there was some negotiation before we actually signed a contract, along with a fair amount of time passing, we agreed on a 10% fee from an early construction cost quote. We paid a builder fee of $21,300 with a construction cost of $229,700 for a total of $251,000. This is in SE TX for an approx. 2500 sf home. I would say our home is a slightly above-average custom home. We even had the latitude to use our own subs on different aspects of the build, but I could not find any better options than the builders own subs. We are very satisfied and happy with our builder's pricing.
homeagain
13 years ago
In central,va we requested quotes from 3 builders. The highest was 30%. The lowest was 9%. The home was a 2800 square foot ranch with higher end finishes.
topman
Original Author
13 years ago
david_cary, I found the old thread that talks about builder's profit % extensively. That's helpful!

One follow-up question I have, does this profit % include overhead costs in general? I suppose overhead is around 2-3% of the entire construction cost. I got a few bids from various builders and they come in around 8%-12% (without overhead) which is pretty in line with what everyone's saying in this market. But if the average market % of 8-12% actually includes overhead costs, then I feel that I may be able to negotiate some more with the builders.
david_cary
13 years ago
My fee# was split between overhead and profit. That is if I stated 15% - 9% was profit and 6% was overhead.

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