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How to Deal with Requests for Fee Schedules

By Michael Stone

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Have you had an architect or designer ask for your fee schedule? If you are asked, what should your answer be?

First, we need to clearly define what a fee schedule is. The consensus of those we asked said that it is the amount a contractor will charge for his overhead and profit to do a cost-plus project. We also need to define a cost-plus contract. Here is a definition that should stand up in any court in the country: * All accumulated costs for the job are passed directly to customer for payment, and * the contractor is paid a fixed fee to run the job or * the contractor is paid a percentage of all costs to run the job. Many of you are still doing cost plus and T&M jobs in spite of my warnings. Apparently getting contractors to stop using cost-plus contracts is like trying to stop the tide with a roll of TP. If you have read our materials before, you know that I am opposed to cost plus or time & material contracting (except for service work). Determining a fee schedule is one more area that can cause a problem with cost-plus contracts, and well discuss that here.

Most job costs are easy to define and profit can normally be assigned a percentage figure that is acceptable to both parties, such as 10 percent. These seldom cause problems, since in a well-written contract the owner has the risk, and will pay whatever the various job costs (labor, materials, subs) actually are. Life for you should be good. That leaves our overhead costs. And here is where the problems arise. Few contractors will agree on what are overhead costs and what are job costs. Example: Is job supervision a job cost or overhead expense? Is the owner of the landscaping or irrigation companys time spent on a given job a job cost or an overhead expense? How about mobile phones? Are you sure? Here is our definition of job costs, overhead and profit to set the standard: * Job costs are all costs that can be charged to just one job. * Overhead are all costs that can be charged to two or more jobs. * Profit is what is left after all the bills have been paid. In most business entities, this definition is good, but not in construction. You may believe job supervision to be a job cost, while the person asking for your fee schedule believes it is overhead.

If agreement isnt reached upfront, there will be problems. Contractors take many items considered overhead by any other type of business and stuff them into job costs. On a cost-plus job, this shifts the expense from the contractor to the owner. Then when the contractor adds the agreed to overhead percent, they can end up charging the customer more than they technically should. Now read carefully here: I did not say more than they are entitled to, or deserve for all their hard work, effort and training. I said more than they technically should. Big difference. If the customer doesnt catch this approach or know the difference, everyone is happy and the job is termed a success. But that doesnt always happen. As time has gone on, owners, architects and job managers are starting to figure out this discrepancy and are arguing the charges.

Normally it takes about 5075 percent of the job to transpire before the owner, architect or job manager notice that the contractor is charging the job for the items listed above, or for material pickup and delivery, vehicle expenses, etc., and the fight is on. Here are two more examples. If a superintendent is supervising more than one job, which is often the case, except on very large residential or commercial projects, you are probably going to be asked how you arrived at the time charged for that particular job. And what about charging bookkeeping time to a job? Do you expect the owner to just take your word for it that someone they have never met is actually spending time doing bookkeeping chores on their job? Wouldnt you question this or have some suspicion? If there is a clear definition of overhead expenses prior to the start of the job, problems are reduced with this method of contracting. But the problems arent over. The next thing you need is to define your fee for the work you are doing. Too many contractors believe that 10 percent overhead and 10 percent profit is the industry standard for these types of contracts. There is no industry standard on overhead and profit. Anyone who thinks there is does not understand that every business will have different overhead expenses. This means they need a different fee to cover their overhead expenses and make a minimum eight percent net profit. It takes at least eight percent to keep your business going.

The old argument of thats what everyone is charging does not make it correct. Set your own fee, based on your expenses, or you may have the privilege of paying the architects and owners so you can build their jobs. I strongly suggest that you use fixed figure contracts only. If someone asks you for a fee schedule, save the future argument and tell him you work by fixed figure or negotiated contracts only.

Editors Note: Michael Stone, with more than three decades of experience in the building industry, wrote the book Mark-up and Profit. Stone offers coaching and consulting services for construction companies. E-mail: Michael @markupandprofit.com, 888.944.0044 or www.mrkupandprofit.com

November 2003


 
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