Remodeler Exchange: The Right Price

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There are many ways to price a job, although the majority of remodelers prefer fixed price. Still, some prefer a running account of time and materials. Two remodelers discuss the pros and cons of both methods.

July 01, 2001

 

Tom Riggs


There are many ways to price a job, ranging from a fixed price based on a detailed estimate to a running account of time and materials used on a project plus a specified markup and profit. Some companies use a hybrid approach that includes T&M and a fixed fee for administering the project.

The vast majority of remodelers prefer fixed price, says Tom Riggs, president of Riggs Construction & Design, Kirkwood, Mo. The firm, founded by his father 42 years ago, is a residential remodeler that expects to do more than $3 million in sales this year in its St. Louis market area, most of that work done on a fixed-price basis. He does some T&M jobs, too, but sometimes finds it difficult to gauge the right number for labor in his heavily unionized market.

"Most of the people around here know what our hourly rate is," he says. "If the job is labor-intensive, we can reduce the labor rate a little bit and still make our margin. But if it’s not labor-intensive — with a lot of subcontracting or high-end materials involved — that becomes more difficult."

Riggs also has found that most of his clients are more comfortable knowing exactly what their cost will be up front and understand that any changes they make after the contract is signed will affect the final bill.

Bill Medina


On the other hand, Medina Construction of Salina, Kan., does mostly T&M contracts, although the company uses fixed prices when the job calls for it. "We do a lot of commercial work. About 70% of our projects are medically related, either clinics or hospitals or doctors’ homes," says owner and president Bill Medina. "Most doctors are familiar with T&M-type pricing — billing for the time it takes to do the job. And most of them are so busy that they don’t have time to sit down to make selections before the project begins. They prefer to make those decisions as they go along. So T&M suits our clients. It’s about educating the client and building the relationship around trust."

One drawback with T&M is that less labor-intensive jobs make less profit: They lose revenues on markup on labor hours simply because fewer hours are required. But they also have less overhead invested, which mitigates the loss somewhat.

A similar problem crops up with insurance work. Insurance companies expect to see a "10 and 10" profit on the contract, which leaves the contractor with 20% for profit and overhead instead of the 33% or better for which Medina aims. So Medina analyzed five projects of varying scopes to figure out a formula to protect his company’s margins. "We have to mark up the labor a little higher and have more line items on the estimate to make sure we cover all of the work items," Medina says.

Riggs negotiates price on about 90% of his work because of the large amount of design work the company does. However, he will "fast track" a project if the client is in a hurry to get the work done. In those cases, he skips the selection process until after the project begins. "That leaves too many things undecided, so we’ll do a T&M. It works, but it’s chaotic. We like to have our ducks in a row before we get started."

A frequent misconception about T&M projects is that there is no budget, scope or even a set of plans. But Medina Construction uses all three up front. The difference is that a T&M arrangement allows work to begin more quickly. "It’s about selling styles and working relationships. We have worked with most of our clients many times and understand what their needs and concerns are," Medina says.

"I don’t like the minutiae, so I have someone in the office who takes care of the packaging for me," Medina says. "That lets me get out and sell more."

Riggs agrees that T&M can be abused by unscrupulous contractors. "It’s easy to not worry about the cost of something because it’ll all come out in the wash," he says. "Clear and quick communication of change orders is important. You have to approach a T&M job just as you do fixed-contract."

To encourage and enforce a consistent contract and project quality, neither Riggs nor Medina tells the crew whether a job is T&M or fixed-price. Sometimes, however, the client lets that information slip by watching the time too closely. "It’s a matter of education and trust," Medina says.

Medina adds that scope creep is another risk in T&M. "It’s so easy to say, ‘While we’re at it ...’ If you’re not careful, the project can take twice as long and cost twice as much. So we follow the scope of work, and even on a T&M, we do an additional work authorization with the time extension and the approximate value of the change, as well as profit and overhead. That way, the client has a record of the change if there’s any question at the end."

Detailed, written records also help build trust between the remodeler and the client. And trust is the essential element in any such relationship. "It’s very important that everything is straightforward," Riggs says. "The only way you can do a lot of T&M is to be perfectly honest."

Medina agrees. "It all goes back to the relationship with the clients. To me, fixed-priced contracts are more of a commodity and something any contractor can provide. A T&M contract is a relationship based on trust."

Time and Materials

Pros:

 

  • Quick start on project; captures enthusiasm of client early.
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  • Flexibility for additions and changes
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  • Less pressure on client to make fast decisions, product selections
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  • Safer for less experienced contractors as long as they maintain integrity

    Cons:

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  • Temptation to make changes and additions to scope and not communicate them to the owner through a change order or additional work authorization.
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  • Overly suspicious or clock-watching clients
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  • Scope creep
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  • No deposit except on design work or AIA contracts
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  • Less profit on less labor-intensive jobs
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  • Need for precise estimates

    Fixed-Price

    Pros:

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  • Major decisions made before project begins
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  • Wider comfort zone for client
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  • Deposit from client
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  • Working with client’s money, not yours
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  • Greater potential for profit

    Cons:

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  • Bigger risk of loss on job
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  • Temptation to cut corners to meet price
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  • Temptation to forget that the deposits aren’t really your money
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  • Need for precise estimates
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  • Risk of overwhelming and burning out client before project starts
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