Working on a cost-plus or construction management (CM) basis isn’t ideal for most remodelers: It’s difficult to earn as much as with a standard contract. But it can be a good option in some cases. One Philadelphia-area remodeler has used it on select jobs to become a hero to clients and grow his business.
David Posternack of Match Remodeling, in Swarthmore, Pa., (photo) has successfully used a CM contract on a handful of projects with impossibly short deadlines and insufficient time to create detailed plans and specs. Rather than a fixed price, he adds a 20% overhead and profit markup to all costs.
One example was when Hurricane Sandy sent a big oak tree crashing through the roof of a home, causing extensive structural and water damage. “The owners were stuck in a hotel and asked if I could start work the next week,” Posternack recalls. In another case, an out-of-state client had just closed on a house that needed a complex kitchen remodel. The project had to be started in three weeks and finished in two months.
In such cases, Posternack gives a non-binding ballpark estimate. He keeps the homeowners up to date on the budget and involves them in all decisions. His designer can create drawings on short notice for the permit application, but many details are left to be addressed on the fly.
Isn’t such uncertainty asking for conflict? While that would be likely on a fixed-price job, Posternack says that it’s not the case here because the contract recognizes such uncertainty—there are no change orders—and he involves clients in all decisions.
“On an emergency basement remodel, for example, we found a sewer pipe that would have to be rerouted,” Posternack says. “So I told the clients that on our project we’ve run into an obstacle. They saw it as a problem we solved together.” He says this fosters a collaborative relationship that gives homeowners a sense of control.
But some remodelers are skeptical of that control. One of them is Dennis Dixon, a Flagstaff, Ariz., remodeler who also trains contractors on business topics. Dixon says that cost-plus should always be the last choice, in part because of the time and documentation required to keep clients in the loop. “A 20% markup won’t adequately compensate the remodeler for the time spent with the clients,” he cautions.
Posternack understands the reluctance but says that the arrangement doesn’t eat up any more time than a standard contract does. “I involve my clients in every decision on a standard contract, anyway,” he says.
He also agrees that his markup is low, and he would like to raise it if possible, confirming that “You can’t build a business with a 20% markup.” Posternack says that he only uses the cost-plus arrangement on a small number of projects where he really wants the work, either to keep his crew busy during a slow period, or because he believes the job could later lead to more profitable opportunities—basically, it’s a loss leader.
The latter was the case for Posternack this past February. In the neighborhood where he’d repaired the oak-tree-damaged roof, an ice storm took down another tree, damaging the neighbor’s house. Posternack’s client recommended him to that neighbor. “It led to a profitable standard contract job,” the remodeler says. —Charles Wardell writes about construction issues from Martha’s Vineyard, Mass.