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JJSteffen Design & Build,Inc.
Morton, IL 61550
Phone: 309.263.3500
Fax: 309.263.6700
Open Book Accounting
We try to look at things a little differently than most in our industry. Outlined below are three pricing structures that we use. We strongly believe that they are not weighted evenly towards the customer, or even the contractor. Below are three different types of pricing structures, pros and cons, and which we think is most beneficial to both customer and contractor.
Good...Hard Bid or Estimate
This method is the old stand by. We still price projects out like this and will undoubtably continue to do so. One benifit to this structure is that very competitive pricing can come about, if the bidding parties are slow on work. Contractors will squeeze their margins in order to keep men working or span a slow period. However, sometimes contractors will start to cut coners in order to make their margins or salvage any sort of profit they can muster.
Not all contractors will do this, there are still good ones out there that will honor their bid and still maintain quality control, but there are also those out there who absolutely will not. Another issue with the hard bid is inflation. When contractors are asked to give a hard bid or estimate, they are more likely to inflate their numbers in order to account for contingencies or soft costs such as utility bills, fuel costs, etc, etc. It is every contractors right to do this and most do, including our firm. But we beleive there is a better way.
Better...Cost plus percentage structure
This pricing structure is based on a negotiated percentage of the project contract. If the agreed percentage is 10%, essentially the customer pays 1.1 times the costs of the entire project to complete the contract. The advantages to the buyer are that they know all of the costs involved and where they are allocated.
That way budget line items can be adjusted for overruns if necessary. However, if there are overruns, the contractore will make 10% of the extra costs as well. With this method there needs to be trust as well as accountability. The owners must have unlimited access to time records, bills, purchase orders, etc. References are even more important here. While we feel this method is better than a hard bid, we think there is still a better way.
Best...Cost plus fixed fee
In a lot of ways, this method is very similar to cost plus percentage. The books are open and the customer has the ability to view where every penny of his money is going. Estimates are gathered, soft costs are estimated, and time analysis is done. Once the figures are totalled, a fixed fee is negotiated between the contractor and owners spelling out exactly what the contractor will recieve for completing the contract. Any savings in construction costs are credited back to the customer.
We strongly beleive this is a great fee structure because the contractor is more incentivized to stay on schedule and on or under budget, because profit margin can increase or at least remain constant. Quality control needs to be addressed in inspections and walk throughs, and trust needs to be established through accountability. Again...References, References, References.
