Cost-Plus quoting and how it works

By John Corban

How a Cost-Plus Estimate works, whether it can work for you, and how to effectively sell it.

Over the past few years, I have been increasingly asked about Cost-Plus estimating, how it works and whether the enquiring contractors should utilise it. The reason for the interest is that many business owners find that Fixed Price quoting can result in labour man-hours exceeding what was quoted, resulting in small or no profit on more projects than they would like.

How it works

When creating a quote in your software or quoting sheet, man-hours are allocated to each area, taking into account your crew’s experience, skill set, site accessibility, and the complexity of the design. Additionally, for each element of the scope of works, all materials and larger equipment (such as excavators and skip bins) will be entered using the base prices in your system.

The hourly labour rate is elevated, which covers the loss of the larger markup on plants and hardscape materials that you would typically charge in a fixed-price quote. The markup you can add to materials, equipment and subcontractors is 20%. Is that enough? Yes, if your labour rate is high enough.

Selling the Cost-Plus estimate
It can be explained as a fairer system. It’s fairer than a Fixed Price Quote because it doesn’t include extra labour hours, unlike each element of the scope of works in a Fixed Price Quote. Typically, extra labour hours serve as a safeguard in case certain elements take longer than expected for various reasons – such as weather, the complexity of the design, a crew member with limited experience, or working at a slower pace, or attempting to build something new.  

You would explain that the Cost-Plus method is a fair system because it only bills the client for the work done on-site, and for the materials and equipment used. The client receives an invoice each Friday for labour hours and materials used during the week, expecting payment over the weekend. You can also offer the client transparency by sending copies of the large invoices, but it’s not essential. With this system, you must ensure that your team is productive and not wasting time, as the client is paying for each hour the team is on site.

Why is this method being utilised by more business owners?

It is a safer method to use for many builds, ensuring profit and preventing the regular occurrence of labour hours being underestimated or blown out.
This method does require systematic and regular communication with the client, both verbally and via email. It is essential that invoicing occurs as you have mentioned and transparency is maintained (if that is what you have informed the client).

If you’re thinking, ‘I can’t use this method because my potential clients want a Fixed Price Quote’, andI hear this often,  I tell my clients about a past client of mine who has used the Cost-Plus method since he started his business15 years ago. His average construction project was between $60,000 and $80,000, and his net profit percentage was as expected on most projects.

In summary, if your Fixed Price Quote method is working well for you and your clients, there is no need to make any changes. However, if you have been considering the Cost-Plus method and would like to try it, start with a smaller project to get accustomed to the process.
 

John Corban
Business Coach for Landscapers, Horticulturists and Nursery owners
Mob: 0433 27 1980
www.landscaperscoach.com.au