Overhead and Profit for Contractors

[Moonstone]

How much can a contractory typically charge for profit and overhead on a quote that has been submitted by his subcontractor. I have a situation where I am reviewing a quote for a potential change to the contract and the contractor has charged 20% profit and overhead. The specs are not very clear about how much they can charge.

 

[greenone]

They can charge whatever you'll pay
Typically, O&P is charged at a markup of 10 + 10, which is 21%.

 

[DRC1]

Generally the specifications should state how extra work should be priced. If not it is what the parties agree on.
20% is not an unfair markup for labor equipment and material. Just be sure how the contractor is developing rates for equipment. Blue Book and AEG have standard equipment rates. Subcontractor markup is generally less (typically5-10%. This is because the sub usually caries overhead in his price and the contractor should not have a significant amount of overhead to administer.

 

[stanier]

Profit is profit. 10% is high.

Remember that most head contractors allow for a profit of 3% on a contract value when bidding competitively. This may sound meagre but you need to consider that the profit is not on the value of the works but the capital employed in undertaking the work.

A $100 million project may take $10million of capital to undertake. Thus a 3% profit of $3million represents 30% profit on the capital employed. But the job has to go well. If a loss is made then that is even worse than appears on paper as it is a loss on the capital employed.

This is why contractors want up front payments and that is why they front end load the value of a project. This way they get your money as the capital to employ.

Overhead depends upon the level of supervision, quality assurance, insurance risks etc. The contractor needs to demonstrate that any variation overhed componenet wasnt merely as acting as a post box.

 

[DRC1]

1) CM's generally charge 2-5% of the contract value if they are not at risk. Very few GC's would consitently bid 3% and stay around long. CFMA lists overall profits and it is generally aound 5% This figure is net(after tax which for business is around 50%) for all contractors in heavy highway. This is an estimated amount of what the industry as a whole did, which includes good jobs and bad jobs. There are many jobs done at a loss every year, and every contractor has had his share of bad jobs. Therefore the margins are kept up a little.
2) Contracting is a very high risk capital intensive business. Business cyles flucutate much more than many other industries. Nobody is in this for 3%
3) Perhaps in residential work contractors can get up front payments, but in most heavy highway contracts, invoices are monthly and payment is 30 to 60 days later. Contractors do try to get as much money as early as possible, but it generally is not a significant percentage of the contract, is used for costs that wont be paid until later in the contract and supports administrative costs of starting the work.
4) There is not sufficent cash flow in a project to do a $100 million project on 10 million cash.Further Contractors, banks and surities do not look at profit on cash flow. Profit for a job is project revenues less direct project costs divided by direct project costs. Cash flow is never considered.
5) If a contractor makes 10% overhead and 10% profit on a project, and the first 10% truely represents his overhead cost on the project, Then any minority share holder dividends would be paid and taxes would be paid (neiher would come out of OH) thus the net profit would be 5-4% net.
Thus I think the 10% + 10% sounds reasonable.

 

[Ingy]

The markup for change order work is defined in the contract documents and varies from project to project. Caltrans (California DOT) is fairly reasonable in its markups and they are:
Labor - 33%
Equipment - 15%
Materials - 15%
Subs - 5%

Without clear contract terms you'll have to negotiate. 20% is not out of line but is higher than many contracts allow.

Look at it another way, does 20% on the subcontractor's quote provide enought $$ to cover the mh required for the general to 1) coordinate the quote, 2) issue the subcontract change order 3) deal with the sub and his questions 4) integrate the subs c.o. work with the existing scope? Usually it is not anywhere near enough to cover the real cost of implementing a change.

This OH/Profit discussion has nothing to do with what is done when competitively bidding the work. Then it is a matter of risk and what the market will bear. Our goal is to get the biggest profit and leave the least amount on the table. It is a business afterall.

 

[GeoPaveTraffic]

As a public owner my goal is to minimize the cost of additional work, while being fair to the contractor. Your question should be what is fair to the contractor. If the extra work does not effect the ongoing work of the contractor, then the amount the contractor makes off the change should be very little. However, if the change effects the ongoing work of the contractor, then he is entitled to make more from the change. This is the problem with "fixed" percentages, they are almost always unfair to one party or the other.

The short answer is, you need to discuss this with the contractor, figure out what effect the change has on his work and find a fair solution.

 

[LCruiser]

There's not enough information in your question. Is it a CM? Is it specialty work that backup up a contractor doing most of the work? An example of what can happen when a CM gets too much markup (from what I've heard from at least two independent sources) was Bechtel on the Big Dig. Through a fluke of the contract, they got 15% as a CM. This means that the $10 Billion dollar overrun "earned" them $1.5 Billion dollars - without a single piece of equipment on the job.

Made the stockholders happy - at the expense of the taxpayers.

 

[boo1]

CM Contract Manager

The G&A pays for many things: risk, insurance, management oversite, contracts, supervision

The fairness depends on the value of the contract change, the contract, and how it changes the scope of the existing work. I have seen major contracts for the U.S. DOD that have G&A + Profit greater then 20%.

 

[Moonstone]

I am the CM, I am dealing with the contractor here. Its a remodel job and there are a lot of subs involved. For any change in scope of work, the contractor goes to the appropriate subcontractor and gets a quote from to do the extra work. The subcontractor then charges his overhead and profit to which the contractor charges his own overhead and profit and then the CM recieves the final quote. In my case, this is a lumpsum quote.

 

[stanier]

How do you know that the subcontractor's price is right in the first place?

 

[LCruiser]

Are you sure you're defining "scope" correctly? It may not be a change in scope, and the definition thereof is purposely clouded by some contractors. "Scope" is not magnitude, nor is it limits. It's type of work. Your reference to the "appropriate subcontractor" doesn't quite fit. There can't really be an "appropriate subcontractor" if it's a change involving new "scope".

You can ask for a breakdown, but be aware that if you decide to go T&M and they mess up it's on you.

The bottom line is that a change in scope doesn't limit you to one subcontractor (in my experience). Is it a big $ value, percentagewise?

 

[cvg]

my definition of scope seems to be a bit different, and would include type of work, amount of work as well as when and where the work is to be performed.