11 Oct 2018

Construction Biz 101 – Billing Unmasked

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The design is complete and it’s time to solicit bids. The client receives a bid summary that lists major line items and sums to a total amount. A second bid similarly lists major line items but not necessarily the same items or total. It’s the same project but the competing bid numbers are different. What the …?! Are there hidden project costs the Owner pays? The short answer is “No, there are no hidden costs, but a bid calculation combines several tangible costs with different labels such as Hard Cost, Overhead Cost and Profit that may differ among bidders.

COSTS DEFINED:

Hard costs are easy to understand. The hard cost includes all materials and subcontractor labor used to construct the project. A good rule to remember is anything you can see or touch is in the bid and the client pays for it.

Overhead is slightly more complicated. Overhead costs include elements you can’t see or touch but are required for the project or business such as permits, rentals (equipment, toilet, dumpster, office), insurance, licenses, printing, fuel and supervision to name a few. Overhead pays business costs, staff salaries and job expenses; excluding subcontractors who charge their own version of overhead. Incidentally, a client pays subcontractor overhead costs also.

Profit is easy to understand but it makes people nervous because they think Profit is a bad word. Profit is the bonus a contractor earns for the work. All for-profit businesses need profit to survive. Properly applied and collected profit pays the company for future growth or investments but does not pay salaries or expenses.

The hard cost, overhead cost and profit can be different numbers for different companies based on the company’s purchasing practices, staff, size, equipment or expertise.

But what about changes to work scope often called construction Change Orders? Think of change order as small bids. A contractor provides a take-off or estimate of materials and services and applies overhead and profit. For example, if a client requested a replacement door change order. The door material costs $550 (hard cost), the install costs $200 (hard cost), the finish work costs $100 (hard cost). After the contractor applies overhead and profit, the total cost to the client is $1,100.

In summary, while the contractor hides nothing in a bid, the client pays for all construction related costs in the form of direct costs, overhead costs or profit. Consider my Construction Biz 101 insight to unmask how construction companies bill.

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About the Author


Your Architect is Eric Faulkner -- an architect licensed in Texas & Oklahoma with 28 years experience in design, construction observation and life.