Monthly Archives: March 2015

How Much Does a General Contractor Cost?

How Much Does a General Contractor Cost?

General contractors are project overseers and they typically bring together the people needed to complete a job. They hire each sub-contractor and add a mark-up percentage to the sub-contractor’s cost. Many general contractors also have their own crew of laborers, for which they charge an hourly rate. Typically the contractor’ s crew will be general carpentry trades people, some who may have more specialized skills. Exactly how a general contractor charges for a project depends on the type of contract you agree to. There are three common types of cost contracts, fixed price, time & materials and cost plus a fee.

Each contract type has pros and cons for both the consumer and for the contractor. While you, as the consumer, are obviously interested in the pros and cons for yourself, understanding how the contract affects the contractor also provides valuable insight.

Fixed Price contracts are just what like they sound like. The contractor bids your project for a specific price and that is how much it will cost…in theory. For small, simple projects, you can probably count on this contract to work for you and for your contractor. However, for larger and more complex projects, the final cost is likely to be higher.

The reason that the cost will probably increase is the high likelihood that there will be changes to your project. Some of the changes may come as a result of changes you make and enhancements to the project, but some changes result from the unexpected. Through no fault of your contractor, unexpected problems will likely crop up. Things like a wall being opened up to reveal termite damage or pipes that can’t be easily relocated or an interior wall that turns out to be load bearing.

So what happens when the unexpected happens. The contractor will draw up a “change order” listing the additional work and materials required and a price to complete the work. While the builder may have been a low bidder on the original contract, they don’t have the same incentive to give you a bargain price on change orders. That isn’t to say that they are going to rip you off, but you need to keep an eye on change orders and evaluate whether they are reasonably priced before approving them.

Could the contractor have built these unexpected but likely complications into the bid? Yes and no. Asking a contractor to bid the unknown isn’t really a reasonable expectation. Furthermore, in creating a bid, they are competing with other builders and don’t want to add on costs that another builder might leave out of their bid. Therefore, bids generally reflect best case scenarios.

Shouldn’t they be required to do the work for the original bid? Maybe, it depends on the specifics of the contract. In some cases, the contract might specify that the work be completed, and all reasonable means shall be used to do so. However, what is reasonable? If an ancient burial ground is discovered under your house, that shouldn’t become the builder’s burden. If the builder breaks a window on the job-site, that is a cost for them to absorb. But what if asbestos is discovered? Asbestos can be expensive to remove, who should bear the cost? Generally, some such occurrences are routine and the builder should incur the cost. However, if the problem is extraordinary, exceeds routine work or requires substantial additional work, it is probably the burden of the homeowner.

With a fixed price contract, the builder can incur cost overruns, which they absorb. When that happens, some contractors may be tempted to cut corners in order to complete the project and still make a profit. Some corners being cut may be the use of lower cost materials, or rushing a crew to complete work more quickly (and possibly not quite as well). An example of material quality substitution is the use plastic pipe instead of copper. Copper is superior but more expensive. If your contract doesn’t specify copper, then the contractor may substitute reasonable materials. Finally, any changes, deviations, or modifications from the original plan will result in a change order and additional cost.

Time and Materials contracts establish a schedule of hourly charges for the laborers, a mark-up fee for materials and a mark-up for all subcontractors. Ideally, the subcontractors will provide fixed price contracts and a detailed “scope of work” for the work to be performed. In this scenario, the builder will complete the project as described and will incorporate any changes requested or required to complete the project. If you add work to the project, the price goes up accordingly.

The mark-up is the profit for the builder. If the scope of work increases, the cost for the work increases and the mark-up is applied to the additional expense. The problem with this contract is that a builder may not be motivated to work as efficiently as they could. Additional hours spent working come out of your pocket, not the builder’s.

Cost Plus contracts are similar to time and materials contracts except that instead of a mark-up applied to every dollar you spend, the builder has a preset fee. Their profit is fixed, and the more time they spend on the project, the lower the percentage return for them. For instance, if their fee is $1,000 on a $10,000 project, they make a 10% profit. However, if the project ends up costing $20,000, their $1,000 fee yields only a 5% profit. The builder is motivated to get the project completed, but overruns don’t hurt them so badly as with a fixed price contract; they don’t have to cut corners.

Choosing the right contractor: There are honest people out there, there are greedy ones and there are dishonest ones. Most people fall into the first category, some into the second, and a few fall into the last category. Whatever contract you use, you will probably do fine as long as you avoid unscrupulous builders. You may not be able to avoid a greedy builder, but by keeping a close eye on costs and being ready to get bids from another contractor you can probably avoid spending too much. A cost plus contract may not save you money, but it probably favors you and your builder equally, and for that reason may be your best choice.

But how much does it cost? The builder effectively increases the cost of the project by a percentage over what the sub-contractors charge. If you hired those subs directly, you could save that percentage. However, the general contractor’s oversight can also save you money. The contractor can make sure the subs are doing their job completely, properly and for a reasonable cost. The contractor can make the project go more quickly by virtue of their experience (over yours and with you hiring subs) that can save you money. The contractor’s familiarity with local building codes, building inspectors, sub-contractors and access to lower cost materials can all work to save you money. So, how much does a contractor cost, anywhere from 5% to 25% of the total project cost, with the average ranging 10-15%. However, it is possible that a contractor may save you enough money, time and frustration, that they pay for themselves.