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I have hired many people for building projects over the years: building a house, remodels, new garage, etc. All of these projects, the guy who I struck the deal with was doing a lot of the work himself. Most deals were struck with a very simple cost break down and a handshake. Payment was incremental but mostly in arrears except for materials for all my projects.
I recently asked a contractor to bid on a garage. He wrote it up as a formal "time-and-materials-plus" contract. It was a surprise to me for many reasons:
- he was not doing any of the work himself. All subcontracts.
- he was charging me a supervising, hourly fee for any time he spent driving to/from and on the job.
- he was also charging 10% fee for all materials and labor and subcontracts
- he was charging me a fixed fee he called "overhead" that came out to about 8%.
- he set up an account that he would spend-down but I was obligated to keep at a minimum balance of $15k.
- the contract had a list of work items, some of which I did not request but sort of made sense. He said not to worry that if he did not do those, I would not be charged. (But I was in a way, since they contributed to the 8% overhead).
So my biggest concern is I am paying him 18% for hiring other guys. That seemed high but never having hired a pure general I thought maybe this is normal.
Next biggest concern is there is no motive in the contract to save me money. The GC makes more money when the costs to me are more, and indeed he kept trying to add stuff to the contract.
The items I did not request (like a custom garage door) but he said not to worry about since if he did not do the work I would not be charged, were still authorized since they were listed in the work agreement. It meant the piece of paper was saying something different from what he was telling me.
Another concern is I am taking all the risk by paying up front, the costs for labor and materials. He is not taking any risk. It seems to me that the person taking the risk should get the reward for taking that risk, but he is paying himself 18% and not taking any risk. That seems weird. Furthermore, he has control over the account and the minimum 15k of money in it so if there is a dispute he essentially has the upper hand.
Another concern is if no work is ever done for some reason and I invoke the cancel clause, I still pay the 8% overhead charge.
I have never worked with someone who is not doing the main part of the work himself.
All of this made me really nervous and I backed out at the last minute. He was a bit pissed because I told him I would sign it and then an hour later I called and said I couldn't.
Is this normal for how general contract jobs are structured?
Paying 18% for someone to supervise, using my money, seems crazy to me. Especially with ambiguities in the contract. I cannot figure out if he was trying to be flexible for my benefit, or if was trying to bulk up the contract for his benefit.
What do others think - should I have backed out or not?
For a garage, cost plus 18%. That's a sweetheart deal for around here. I wouldn't touch it for that. I'd be nearly twice that at 30%. A house would be different but still I get cost plus 20% and until I retired this year, had a backlog of over 2 years work at those rates. A typical national home builder margin will be over 30%, to give you an idea. Obviously they don't build garages only but that will give you a yardstick to measure by.
First of all, if you don't like the contract, do not sign it.
Second, if there is something in the contract that does not look right, do not sign it. Having him verbally explain away something in the contract will go away if you ever end up in court. What matters is what's in the contract, not what someone says (thats contrary to whats written).
That said, overhead is common in construction contracts. That is one way for the contractor to earn money. While he may not swing a hammer, he does have to find subs, coordinate work schedule, material delivery, and oversee the actual construction. He wouldn't stay in business very long if he didn't charge for this.
If you are not comfortable with the contract, or the contractor, then you should look elsewhere.
The only way to know if it was a good deal or not would be to know his reputation - I certainly think it's *possible* that a gc could get deals so great on labor that you wouldn't care about the 18% markup, but as you mentioned, the contract gives him all the power & it could be abused as well.
I think the Phoenix metro might be unique, in that it's quite possible to do rehabs "Bob Villa" style, where you hire everything done & don't do any work yourself, still getting great results & not spending so much cash. So the fact that he's subbing everything out isn't surprising or necessarily bad. On my last rehab a few months back, I kinda left most of the work to a main, "trusted" sub, but called in a few different specialists for certain critical trades - I.E., tile removal is a specialty & while almost anyone *could* rip up tiles, the guys who do it daily do it so fast & cheap that hiring anyone else to do that job would just cost more & take longer.
Again, I think it comes down to reputation- someone who does flips & rehabs regularly most likely has a list of trades they can call who don't charge much & do great work, but you'll want to talk to previous customers to know that. If this guy can't rattle off half-a-dozen good references that you can go visit yourself & chat with, then it's prolly just as well that you walked.
That said, just managing contractors is a full-time job in itself & not everyone has the capacity to do it well - I'd gladly pay an additional 18% if I could find someone who worked & thought like I do on rehabs.
18% is reasonable for the GC. This isn't all pure profit, they do a lot of coordination and spend a lot of time doing it. You are paying them to do their job. The 8% overhead should only be applied to actual billings, not theoretical cost for options you don't choose.
T&M+ would worry me. I would be more comfortable with a binding bid.
If they include costs for items in the written contract, it means that you are buying those items. If you don't want the fancy door, don't allow it in the contract.
I would not be thrilled with the $15k float, so I would press to renegotiate that. Materials up front, then payment equal to %of completion on a monthly basis is always reasonable. This requires the general to provide you with a schedule of values, such as:
Site work $10,0000
Foundation: $20,000
Electrical: $10,000
Etc.
In the first month, you are likely to have to pay 100% of the site work and foundation work. A bit for electrical if the electricians get started, but nothing for roofing, because those guys aren't there yet.
The bank account that you don't control would be a major sticking point for me. I wouldn't pay a sub without both a receipt & a lien release. In some areas, a sub can lien a property after the job is completed, so lien releases are a very big deal.
First of all, if you don't like the contract, do not sign it.
Second, if there is something in the contract that does not look right, do not sign it. Having him verbally explain away something in the contract will go away if you ever end up in court. What matters is what's in the contract, not what someone says (thats contrary to whats written).
That said, overhead is common in construction contracts. That is one way for the contractor to earn money. While he may not swing a hammer, he does have to find subs, coordinate work schedule, material delivery, and oversee the actual construction. He wouldn't stay in business very long if he didn't charge for this.
If you are not comfortable with the contract, or the contractor, then you should look elsewhere.
I can't stress this^^^^ anymore than BS did. If you're not comfortable, you're not comfortable. And never base a major building project on one bid- PERIOD!
I have hired many people for building projects over the years: building a house, remodels, new garage, etc. All of these projects, the guy who I struck the deal with was doing a lot of the work himself. Most deals were struck with a very simple cost break down and a handshake. Payment was incremental but mostly in arrears except for materials for all my projects.
I recently asked a contractor to bid on a garage. He wrote it up as a formal "time-and-materials-plus" contract. It was a surprise to me for many reasons:
- he was not doing any of the work himself. All subcontracts.
- he was charging me a supervising, hourly fee for any time he spent driving to/from and on the job.
- he was also charging 10% fee for all materials and labor and subcontracts
- he was charging me a fixed fee he called "overhead" that came out to about 8%.
- he set up an account that he would spend-down but I was obligated to keep at a minimum balance of $15k.
- the contract had a list of work items, some of which I did not request but sort of made sense. He said not to worry that if he did not do those, I would not be charged. (But I was in a way, since they contributed to the 8% overhead).
So my biggest concern is I am paying him 18% for hiring other guys. That seemed high but never having hired a pure general I thought maybe this is normal.
Next biggest concern is there is no motive in the contract to save me money. The GC makes more money when the costs to me are more, and indeed he kept trying to add stuff to the contract.
The items I did not request (like a custom garage door) but he said not to worry about since if he did not do the work I would not be charged, were still authorized since they were listed in the work agreement. It meant the piece of paper was saying something different from what he was telling me.
Another concern is I am taking all the risk by paying up front, the costs for labor and materials. He is not taking any risk. It seems to me that the person taking the risk should get the reward for taking that risk, but he is paying himself 18% and not taking any risk. That seems weird. Furthermore, he has control over the account and the minimum 15k of money in it so if there is a dispute he essentially has the upper hand.
Another concern is if no work is ever done for some reason and I invoke the cancel clause, I still pay the 8% overhead charge.
I have never worked with someone who is not doing the main part of the work himself.
All of this made me really nervous and I backed out at the last minute. He was a bit pissed because I told him I would sign it and then an hour later I called and said I couldn't.
Is this normal for how general contract jobs are structured?
Paying 18% for someone to supervise, using my money, seems crazy to me. Especially with ambiguities in the contract. I cannot figure out if he was trying to be flexible for my benefit, or if was trying to bulk up the contract for his benefit.
What do others think - should I have backed out or not?
Individually, most of the terms are not unusual. However, the combination of terms is unusual. Some are "either/or"; not "also" or "in addition to".
A GC that does none of the construction work would expect about 10% of the total project cost. This is derived from marking up specific, individual materials and labour costs between 5-15% (more if the project location is problematic for some reason). That is all the GC would get. That 10%+/- includes your portion of his costs, overhead, and profit. GC's often get 3-5%+ from material purchasing discounts, etc. but these have nothing to do with you. I'm just saying he has other ways of saving/making a little more than what you pay him.
What is in writing takes precedence over everything else. All contractors know this. All judges reinforce this.
Without discussing anything else, I think I've sufficiently explained why you were wise to back out.
The account, in which he establishes it and you were to maintain a $15K min., is such a big red flag I don't know what to call such nerve!
I also suspect his way of itemizing things were to let him, ultimately, charge you more for things that you thought were at a set price. Depending on the laws in your area, he could have gotten a bit creative with the final bill and prevailed in court.
BTW, you didn't mention if the GC was required to prove workman's compensation and type/level of insurance coverage for each sub-contractor or if each sub would provide their own. This would impact his %. Nor did you mention you'd get quit claims from each sub before your GC got paid each portion due him.
A good GC managing your project is priceless. It's not a matter of paying him just to sub out work. I'm not trying to defend the guy. It's always a nightmare when someone hires my guy for part of a job and doesn't schedule properly. Like doing a bathroom remodel and halfway through the carpet guys start laying carpet. Subs can be a handful.
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