Project Costs
What do you suppose happens if your contractor digs your foundation and then disappears for several weeks, only for you to find out that he is in jail ? It isn’t pretty. Qualified contractors are worth their pay.
Tuesday, April 21, 2009
Thursday, April 16, 2009
Project Costs
The bids on the project were all within 2% of each other. That meant that my drawings were thorough. But the client still wanted a lower price. Rather than change the scope of the project (the correct action at this point) they decided on a less than ideal tactic. They pulled the low bidder in and offered the project to him but said that it had to be substantially lower. Amazingly, the bidder came back with a price that was substantially less than his original bid. Remember, overhead and profit is usually around 16%. In my opinion, it wasn’t possible to complete this scope for that price. The client jumped on it. After the first pay application, I could tell that the books were cooked. He wasn’t going to have enough money in the project to pay for all of the trades. Repeated warnings went unheeded. Time always tells in these cases. Qualified contractors are worth their pay.
The bids on the project were all within 2% of each other. That meant that my drawings were thorough. But the client still wanted a lower price. Rather than change the scope of the project (the correct action at this point) they decided on a less than ideal tactic. They pulled the low bidder in and offered the project to him but said that it had to be substantially lower. Amazingly, the bidder came back with a price that was substantially less than his original bid. Remember, overhead and profit is usually around 16%. In my opinion, it wasn’t possible to complete this scope for that price. The client jumped on it. After the first pay application, I could tell that the books were cooked. He wasn’t going to have enough money in the project to pay for all of the trades. Repeated warnings went unheeded. Time always tells in these cases. Qualified contractors are worth their pay.
Friday, April 10, 2009
Project Costs
Years ago, I bought some windows for my home. I selected a good product, but behold, they were installed improperly. Before long I was paying to heat my neighbor’s air space. The problem was the installer and the cost to me was operational.
A cheap contractor is usually not worth the savings. His opportunity for error will cost you many fold in operations.
How does this happen? Well, the selector often believes that beating down contractors will result in great savings. But let’s look at where a contractor’s costs go. All of the bidders are buying the same raw material. Yes, one contractor may get a slight discount from a supplier. But you can’t control that and neither can any particular contractor. After all, if he is a half way bright contractor, it is to his advantage to have already found the cheapest prices for material. The same goes for his subcontractors. What’s left? Overhead and profit. That’s usually about 8% for each (actually quite a bit less profit these days). Overhead is hard to shave significantly so when we beat down a contractor we are really comparing his profit to another contractor’s profit. Eight percent may seem like a lot of profit but consider the duration of his involvement and the number of employees committed to a project. A $750,000 project that requires ten staff members (office and field laborers) for one year will probably only yield a profit of $50,000. If a bidder has offered to do the project for $50,000 less than everyone else, something’s up. You know he won’t do it for nothing, so he has either made an error or has a plan to cheat someone. Qualified contractors are worth their pay.
Years ago, I bought some windows for my home. I selected a good product, but behold, they were installed improperly. Before long I was paying to heat my neighbor’s air space. The problem was the installer and the cost to me was operational.
A cheap contractor is usually not worth the savings. His opportunity for error will cost you many fold in operations.
How does this happen? Well, the selector often believes that beating down contractors will result in great savings. But let’s look at where a contractor’s costs go. All of the bidders are buying the same raw material. Yes, one contractor may get a slight discount from a supplier. But you can’t control that and neither can any particular contractor. After all, if he is a half way bright contractor, it is to his advantage to have already found the cheapest prices for material. The same goes for his subcontractors. What’s left? Overhead and profit. That’s usually about 8% for each (actually quite a bit less profit these days). Overhead is hard to shave significantly so when we beat down a contractor we are really comparing his profit to another contractor’s profit. Eight percent may seem like a lot of profit but consider the duration of his involvement and the number of employees committed to a project. A $750,000 project that requires ten staff members (office and field laborers) for one year will probably only yield a profit of $50,000. If a bidder has offered to do the project for $50,000 less than everyone else, something’s up. You know he won’t do it for nothing, so he has either made an error or has a plan to cheat someone. Qualified contractors are worth their pay.
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