A coaching client called recently. He was working with a potential customer who wanted a remodeling job with an estimated sales price of plus or minus $150,000. The customer asked him to do the job on a cost-plus basis instead of a fixed fee contract. This customer had talked with at least two other contractors who told him they would do his job at cost-plus 20%.
Our coaching client told me he could not understand how these contractors could do the job at cost-plus 20%.
If you’ve watched our video, you know I hate cost-plus or time and material contracts. But I know there are contractors who continue to use this method. Some people have to do things their own way, regardless of what it might cost them.
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How can you handle this situation? First, no one can build a remodeling job for their cost-plus 20% to cover their overhead and profit, and stay in business for long. It is a mathematical impossibility, regardless of the size of the job, the type of job, where it is located or your company name. They may not even stay in business long enough to finish that job.
So tell your potential customer the same thing. Tell them that your jobs have to be a win-win situation for both you and your clients, you are in business to stay in business and make a profit, and if you do that you will be around in the future if they need you. If cost-plus is their approach to doing business, you will pass. Say thanks for calling and wish them well.
If, on the other hand, they will give you the details you need to assemble the job on paper, and allow you to compile an accurate fixed figure quote, you will give them an accurate lump sum quote and you will guarantee the price as long as they don’t make any changes. Remind them they will never get that commitment from the guys that do cost-plus.
Remember, customers talk about cost-plus contracts because they mistakenly believe they can get jobs done cheaper. If the customer is only interested in cheaper, they will do everything they can to keep you from making a profit on that job. That is a NO WIN for you and a good job to pass on.
If you need more information on why Cost-Plus or Time & Material contracts are a mistake, check out this article on our website.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.