Open Your Business to Open-Book

When building a custom job, one way to price it is open-book cost-plus including a client/builder agreed-upon profit. The profit can be delineated as a percentage of the job or as a flat fee. The builder’s management fee would include all overhead costs, site supervision costs and an established net profit for the job.

Do you think open-book management as a basis for a custom job is better for the client or the builder? Having completed more than 100 custom jobs using this approach, I conclude that it is always a benefit to the client, even though it requires the builder to communicate and educate the client on many details and nuances of construction, scheduling, budgeting and selections.

I am an advocate for bidding most custom residential jobs on a cost-plus management fee basis. It has served me well in both rising and falling real estate market conditions. However, I won’t use this approach when:

  • A prospect rejects the concept and insists on a fixed-price proposal/contract.
  • The job is a relatively simple remodeling project and has few variables such as a small bathroom or a deck replacement.
  • I am building on land I own and using a house plan I previously have built, or a spec home which is under construction and the majority of the selections have been made.

In almost all other custom build opportunities, I will suggest and promote the win-win benefits of open-book construction management. Here are several reasons I suggest you consider working with an open book.

To sign up a cost-plus project, you must create and maintain both trust and credibility with your prospect. Since these are essential foundation components in any sales process, you are forced to initiate this key aspect of your relationship early in the sales process. This is a benefit to any credible, trustworthy builder.

You can openly discuss any of your builder costs on past projects and offer pricing examples on similar phases. Today, between the economy and instant pricing on the Internet, your prospect often will know as much or more than you about some of the labor and material costs. So, if your prospect has secured equal or better pricing than you have, simply thank them and agree to professionally evaluate their bidder. There are potential pitfalls inherent in opening your business to new suppliers or contractors but there also are benefits. For example, my three radiant heating bids on a recent job were on average 25 percent higher than the bid my client secured. Following due diligence, the equipment was installed and the work was flawless. Now I have a new radiant heating contractor.

Profit is not a bad word in a sales meeting! Your prospect is curious about how much you are making, even if he is not bold enough to ask you. In open-book construction management, I bring up the topic by stating that as soon as the prospect and I agree on how my profit will be calculated, we are on the same team, allied with the goal of securing the best design and quality for the best value we can find. If he wants to bring us a competing bid, we welcome the opportunity to keep our pricing competitive.

Once I have described the benefits of seeing my costs on a detailed phase-by-phase spreadsheet, I then can ask for the sale; even if the design is fluid and we know it will change; even if he has not spoken to other builders.

Since I will provide not less than two bids on every significant phase, why should the client invest more of his valuable time researching another builder? Why not stop shopping for a builder and let me do what I am good at? I’m good at assisting him with obtaining the best quality and design his budget will allow, while assuring him he is not being overcharged and that I am making a fair and reasonable profit for the experience and service I am offering.

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