Time and material contracts are a dream for contractors because the homeowner pays the cost of the project plus the contractor’s markup — no guesswork involved. Most remodelers, however, provide their services on a bid basis — a fixed price for the project. When doing so, there are many pitfalls to avoid.
Never disclose your percentage markup in your bid. Either provide the client with one total dollar amount for the remodel or, if they insist on a line-item bid, bury the markup in the line items. If you disclose a profit amount to the client, they may have the right to audit your books at the end of the project to verify that your profit percentage was actually what you represented it to be.
If at all possible, don’t include labor charges in the allowance amount. This gets very confusing to the homeowner. If you tell them the tile counter allowance is $20,000, they think they can spend that much on the materials. Your contract should state that if the owner chooses a substantially different material, the allowance amount will be credited and a change order will be submitted for the new material cost, the additional labor to install it and profit and overhead on the difference. And remember, if you are going to charge profit and overhead on an amount in excess of the allowance, be prepared to rebate profit and overhead if the cost of the items chosen by the owner is less than the allowance amount.
If the scope of work changes, prepare a change order and have the owner sign it before physically making the change to the project. Even if there is no price change, prepare the change order anyway. It will prevent the homeowner from coming back later to say you did not follow the plans. Also, don’t forget about changes in the time of completion. Even if the dollar amount does not change as a result of the change in the scope of work, the change may affect when you will be finished with the project. Indicate the new completion date through a change order.
Have you ever had a client who wanted you to participate in every meeting with the designer just in case your input was needed? Some clients get out of control with the number of meetings; they want to have with you. In your bid contract, limit the number of meetings, for example “the contract price includes two one-hour meetings per week.” Indicate in your contract that you will participate in additional meetings provided you are paid on an hourly basis. This will force your client to be more respectful of your time and will put a few extra dollars in your pocket if you do get called for some extra meetings.
Your contract needs to specify how you are going to invoice the client — percentage of completion, payment on completion of milestones, specific dollar amounts at set intervals.
You should also specify how you are going to invoice for change orders. These can be paid in advance of the work being performed, at the time of completion or you can redo the entire payment schedule to incorporate the increase (or decrease) in the contract price. Check your state laws for any limitations on how or when you can charge for the work.
Retentions and punch list work
Remodelers always have a hard time getting that last payment out of the client. It seems as though the punch list never ends. Include language in your contract that provides for full payment on completion of one punch list. If there is one item on the punch list that will cause delay in completion (i.e., materials need to be ordered), your contract should provide for a release of part of the retention. I usually suggest holding back 150 percent of the value of the one item that will be delayed.This way all your money is not held up pending one small item.