- I can think of one
project we did last year where we had a cost-plus contract. We actually came in under budget, and we actually offered the
credit back to the client, which is great, and if we had
signed a fixed-price contract, we would have made more money on it. But that's not the way we signed it. (upbeat music) What's up guys, it is
Coffee Break number 14. We have a couple questions this week. This is a repeat, not a repeat question, but that he wants me to
elaborate a little bit more. At Edward Duff reaches out and says, "Can you explain your
pre-construction agreement "in a little more detail? "Is this an hourly fee or a fixed fee? "If an hourly fee, do you give
your client a maximum cost? "And is the fee dependent on
scope of work complexities, "unknowns, et cetera?" Great question, and lemme
elaborate a little bit more on the pre-construction 'cause
in the previous episode, we talk about what that
pre-construction process is, so lemme kinda recap that. We take a fee and depending
on the size of the project, it can range from $10,000,
25,000 or greater than that. If it's a smaller project, that we tend not to do as much anymore, that fee would be less. It's based on how many hours
we think we're gonna spend in developing the budget and
working with the design team and the client to help outline the scope, the budget and the schedule. So it's really hourly dependent. So we're looking at how many hours we think we're going to spend on that and then setting a fee. So for instance, let's use
the $10,000 for an example. Let's call that $100 per
hour, we're figuring $100. I'm sorry, 100 hours at $100
an hour puts you at $10,000. And we're thinking that, "Hey, that's gonna give us enough time "to put all this stuff together." If we think it's gonna be more than that, we might bump that up. But now here's where the question wants me to dig into a little bit more. Well, what if you do estimate 100 hours and you're starting to trend
more than that 100 hours? That's in the agreement, and it explains that we're
going to track our time against this fee. This retainer, we call it. We're gonna track our time
and as we're tracking it, we're gonna be having these
meetings with clients, and essentially, we wanna
have a meeting where it's, "Hey, the design is so far along, "the budget so far along,
the schedule so far along." And ultimately, when
we wanna get to a point where they make a decision,
whether or not to build, and hopefully, and most
of the time, I would say, it happens before that 100 hours is up. If we're trending towards that 100 hours, we're gonna reach out and say, "Hey, listen, here's our
time that we've put into it. "Here's where we're at. "We're thinking that
we're probably gonna start "going over this 100
hours, we need to discuss." And in that agreement, we
explain that the hourly rate for this is X amount, and
should we start going over the 100 hours, we're going
to be billing at that and we will just track our
time and bill it accordingly. So that I hope really answers it and elaborates a little bit more on the pre-construction side. Edward goes on to ask another question. "How do you decide if a
project is time and material, "cost-plus or fixed-price? "And which of these systems do you prefer "and is the most profitable for you?" So really Quick Time material,
cost-plus, fixed fee. I'm sorry, fixed cost. Time material is, "Hey, I
charge X amount per hour, "and my material cost is this
much, and we bill at that." Cost-plus is, "Here are all my costs. "This is all the cost I have in labor, "all the cost in material, "I'm billing you that, plus a fee." So that is cost-plus, different
than time and material. Time and material is a set time rate. And this is I think, even
myself included, early on, I got tripped up on where cost is defined as your actual cost. So it should be the
actual cost per man hour, where time and material
might be an hourly rate. So for instance, if you're
paying someone $25 an hour, your cost on them is probably
somewhere, based on my math, 36 to $40 an hour depending
on what benefits they have, and things like that. So you're gonna be
wanting to bill them out at 36 to $40 an hour,
but maybe you wanna make a little bit of money on them. So maybe you're billing
them out at $50 an hour. That can be a time and material. There's where you're
making some of that money. Where cost-plus realistically
it should be figured at 36 to $40 an hour,
whatever their cost is, and then the obviously
material but then your fee is on top of that and your fee can be whatever the
structure is, a percentage, 10, 20, 30 whatever the percentage, that you deem as acceptable for your plus, and I can't really get... I don't wanna get into
that because there is... It's wildly dependent on so many things. Your overhead, your
goals with your company, what product that you're... The level of execution. People always ask like,
"Well what's your fee?" It's like, well I can
tell you what our fee is, but you have to understand
what goes into that. The overhead, the amount of
people that are in this company that are really focused on the execution, the rip-it-out mentality has
to be encompassed in that fee. So there's a lot of things on that side. The reason I'm explaining this
before I answer the question is because it's important to note that and important to understand what cost-plus and how cost-plus is different
from time and material, and making sure that you're
outlining that accordingly. Fixed cost, is when you look at a project, you go through everything you, price it, and you say the project
is gonna cost $100,000, and that's it, you're signing a contract, you've outlined, "Here's
the scope of the work, "here's the price of the work." The problem with fixed
cost, is when things might get missed, which, it
happens or there's a delay in the project or the client
doesn't make a decision quick enough or decisions weren't made prior to committing to a cost. That's the reality of what we're doing, and that fixed cost unless
you're issuing, like... Unless you go into this
change order madness of, "Okay, now you've
decided that's more money, "let's issue a change order." The fixed cost side of it is
dangerous in a lot of ways. And I'm not saying it's better, nor worse. It's dangerous in a lot
of ways in the sense that you're taking the risk for
decisions not being made and committing to a cost,
when you can't commit, you haven't even committed to a scope yet. So that's where cost-plus comes in and that's, I feel is more
common, at least around here, is that the cost-plus is you're... Essentially it costs what it costs and you're paying us the
fee regardless of it. We take a different approach and we kinda mold the two together. So we typically operate cost-plus because most of our projects
aren't completely defined yet. And for us to commit a cost to a project is very difficult unless
we have every single detail and we have provisions in there for things that might
be out of our control. Site work or maybe it's a remodel and what we find after
demolition, things like that. But the way we mold them together is, we are working in a cost-plus manner. So we're tracking our
costs on a daily basis and presenting them on a monthly basis. And time and materials,
some contractor costs, material costs, payroll costs, and then putting our fee on top of that. This is where it's different and this is why we bring
the pre-construction and that's where I wanted
to dive into in beginning. On pre-construction, we're
basically taking the job, say it's preliminary design, we're gonna start outlining
that preliminary design and start working on line
by line, what things cost. And our goal there is to
help unfold the design, help unfold the scope, and get as many of these
questions answered, so we're delivering a budget that is really, really accurate. So we're basically coming to
a point where it's almost... It's very close to a fixed cost. The reality is at this point,
if we've done our work, we could sign a fixed cost
contract and be in good shape, because we've done all of this homework to really price everything. The cost-plus protects
us in the sense that, the things that are still unknown, or the things that are still... Have not been decided on, that,
it's not just going to be, a conversation about,
"Well, stuff has changed "'cause we didn't assume correctly." It's, "Hey, it's cost-plus, like this... "We hadn't made these decisions. "This is what it ended up costing. "We're costing it, we've agreed to that. "And we're moving forward." But doing all that homework
and getting to a point where you can get really,
really accurate with the cost is really the goal. And I can think of one
project we did last year where we actually sent... We had a cost-plus contract. We actually came in under budget and we actually offered the
credit back to the client, which is great. And if we had signed a
fixed-price contract, we would have made more money on it, but that's not the way we signed it. The other side of it,
I'm thinking of a project that we have more recently,
is that at the end of the job, we had some overruns. There are a couple of
subcontractors came in a little bit higher, we
probably squeezed them for a little bit more detail
or asked them to slow down and do a little bit more work
and they charge us for it. We were 3% over on a 3/4 of
a million dollar project. Not a terrible swing, 3%'s, not that... I mean, it's a lot of money, but it's... I would say in my eyes
we're within reason there. I mean, that's a pretty
pretty small increase to make sure that our
execution level is there, and we were covered for it because we're in a cost-plus manner. But what it all comes down
to at the very crux of it is that you have to have trust, and your client has to trust
you and there has to be honesty and you have to be explaining that process and you guys need to trust the
process, trust the approach and trust each other, because this is... There is a lot of money
typically and transactions in construction and making
sure that you're communicating those transactions
clearly is going to help that conversation and help outline what is the right move for you. So at the end of the
day, what do I prefer? I think I do prefer the cost-plus manner, the cost-plus approach
because it does protect us, and we can... We have that security of
if something overruns, we're still covered for it. But the other side of me really would love to get to a point where it's fixed cost, because, at the end of the day, it's just less work in the sense that we've committed to a cost, we're gonna bill on that schedule, and we're not compiling all
this paperwork every month and presenting it and showing, "Hey, here is the cost and
here's how we got there." We're gonna do that anyway,
but the presentation side of it just adds a level of complexity
to the entire process. So there is definitely benefits to both. I don't think either is right nor wrong. But for us right now
being that we don't get all of the details in the very beginning, and we're getting into construction at such an aggressive
pace, cost-plus is just... Just makes the most sense for us. All right, another
question from Seth Divina. "I really wanna know how you
built the team you have now "and how close you are with them. "How personal do you get with them? "Do you ask them about or
know what motivates them? "And do they share with you "where they wanna go longer term?" There's a lot of questions there. And I'm gonna kinda just ramble about this because we recently were
gonna record an episode of the Modern Craftsman Podcast,
had a guest cancel on us. And the three of us kinda
just chatted and looking back, I wish we saved the recording. We talked a little bit about people, very specifically, so we had... We chose to delete it
just 'cause it was... We used a lot of names
and numbers and salaries and things like that. But what we talked about specifically was, let's talk about the financial side of it, what an employee, a team member,
someone that works for you or me, wants in their life, and from a financial standpoint. And I say this truthfully
and openly is that when someone comes to me and
wants to join our company, I ask that question. I try to get the money
thing out of the way because everyone always wants to make sure that they're coming into position, that they're offered
something, a fair salary, or the opportunity to
make what they intend... That they hope to make, or
maybe it's a lateral move where they're leaving a company. I've been in the position
where people have come here and made more money than they were before. But I've also had the other side of it where people have left higher
paying jobs to come here because they believed in it, but the conversation always went back to if the position didn't allow for us to pay a certain amount, I wanted to make sure that
we were outlining that path. And I use the wild the example
that, and I've said this to a couple of the guys like, "You wanna make a million dollars a year? "No problem, let's figure
out how you get there." I'd love to do that. If I can figure out what
I need to do to make that, I would do it as well. That's not the point, the point is, there's value in what we
produce in time, so... And having that conversation
and being open about it, from a financial side is
really important to me, because I don't want
someone to be in a position where they feel as though
they're financially strapped or they're never going to get to a point where they can continue to
grow or make more money. I want the money to be as
secondary as it possibly can be. So they're coming here genuinely because they love what they do, and they get to focus on that first, rather than having to worry
about working over time or doing a side job or whether or not they're making enough money or even in a position that
they have the opportunity to make more money in the future. I try to have that open conversation, and that's the same
thing with what they want from a personal level or from
the position that they are in. And this touches me kinda
closely, especially recently, that we've had a few people that have left and have had the conversation. And two people recently, that, ultimately, they weren't happy, in the sense that what they were hoping to
achieve in their career wasn't what we were offering. And I fully support that, like to the moon and back, like everyone that I've
ever had a conversation similar to that, I've always said that I would fight for you. I'd sit here and fight for you to stay, if I truly believe that
you wanted to be here, but if you do not wanna be here, then I'm going to 100% support
and make this transition out as easy as possible,
and that's really hard, because especially talking one on one, it's like, it's sad for me. It's probably sad for them. It's usually not an easy
decision, but I wanna make that... I wanna make sure that that
person knows that this is okay. If what we're offering
here as a carpenter, isn't what you're looking
to achieve, hey, I get it. I respect that. What can I do to make this easier? Are you looking to apply at another job? I'm happy to be a reference for you. Are you looking to change career paths? I'm happy to help facilitate that. Are you looking to go
start off on your own? Great, if you need work, maybe
we can subcontract to you because you've been so loyal
to us this entire time. It's really about that support and that... There's a handful of
things about like how close I am with everyone, and I try
to be on a very even level and be personable, and I don't... I guess I don't look at this as an... I don't try to be an authority
figure in that sense, and maybe sometimes it works against me, but I do genuinely look
at this as a family. I look at us as working
together for a common goal. And when people that don't wanna be here are ready to leave, I need to support that and help make that transition
as easy as possible for both of us because it's
gonna hurt us financially. It's gonna hurt us in the
manpower side of things. But ultimately, it's the
right decision for them and the right decision for us, because what we need is people
that are truly truly here for the right reason and to touch on that just a little bit more, that's
why I find it so important to be open about this and talk about this and be positive about it, because you want your team to
come to you and explain that, "Hey, listen, this just
isn't working for me." Or, "I really wanted to get
into this type of carpentry, "and it's just not what you guys do here. "I appreciate what I've had here, "but I'm gonna choose to
go a different route." Making sure that that conversation is open and I'm allowing it to... I shouldn't say allowing it, but I'm... I take it in a positive
manner because for them to... For it to be such a difficult
thing to talk about, if there's any sense of negativity to it or if they're nervous or
scared to talk about it, that's just, inevitably delaying... It's delaying the inevitable. And I wanna avoid that because
we can help plan for that. I wanna help plan for everyone that doesn't intend to be here forever, that does intend to be here forever. And I wanna be a support
to everyone as individuals, whether they're on my team
or someone else's team, that's what I'm here for. That's why I do this, this Coffee Break. That's why I do the
Modern Craftsman Podcast. This is why I connect
with you guys at events when we were able to be at events. This is why we produce this content. This is why Doug is
working for us full time, because we genuinely wanna
share and help shape everyone as individuals and I mean that
from the bottom of my heart, that if you're here working for us, working for someone else
here now and wanna leave somewhere else and wanna come to us, like I wanna look at you as an individual and help support you in
the best position possible. So Seth, I hope I answered your question. As always guys, appreciate you
guys asking these questions. If you have questions for
an upcoming Coffee Break, make sure you drop them
in the comments below. Try to do in the most recent video 'cause I tend to go back to those first and then pull up a handful of screenshots, but I really appreciate them. I'm having a lot of fun
doing this on a weekly basis. Until then we'll see you next week.
