Remodeling: There's a perennial debate surrounding the relative merits of time and materials billing vs. fixed-price contracts.
In most respects, I think it's no contest: Fixed pricing wins hands down for lots of reasons. It holds the potential for higher margins. It provides a strong incentive to clients and remodelers alike to buy right. And it keeps clients' prying eyes away from parts of the business, like markup, that they wouldn't understand anyway.
3 comments:
In PTM, we often miss out on a critical phase of selling projects in the commercial world: job costing. When estimating for our productions, every party involved knows exactly how much money we have to spend in our budget, as well as what the raw labor and material costs are approximately going to be. While this works well within an organization, interfacing with customers or clients means you need to consider not only how much a job will cost to physically produce, but also how much you need in order to keep the lights on and your workers happy. While determining what markups need to be in order to accomplish this is definitely outside my wheelhouse, I have seen it done via built-in tools on estimation spreadsheets. Another consideration is how one would present a quote to a client- this depends a lot on the client and the scope of work. While one client may only want to see the whole number, another is going to want to dig into the gritty details to understand exactly what they are paying for and why.
There was a major proportion of this article that flew over my head. I didn't realize that it was about building homes until I started reading it but I understand why this is a valuable article. The end summarizes the point of the article well. Saying that contractors should only have fixed prices if they understand the correct amount of materials and labor costs that are associated with a project. It is not fair to the customer if you are overcharging them, and it is a loss to the company if they have the wrong labor and material estimates. You have to account for the time it would take to cost out a project (that is still a part of the job and someone should be getting paid to do that work as well) Managing projects, tracking budgets, tracking labor, hiring a crew that will be productive, making the customer happy, is a lot to do. I think that both fix-price and cost-plus have their uses and the project that is being taken on should be evaluated before a price is agreed on.
Job costing is certainly something that we don't often think about in the regional theatre world as technical directors, but is certainly something more important in the commercial environment. In many ways our operation starts to branch outside the adjacent industries of home remodeling and commercial construction. As Al mentions, we are often provided a budget to work from, where contractors start with a project to determine its budget. In the commercial scenery world, however, things operate much more like the construction industry. This gets to the heart of the finances though: who is paying for it? In the commercial world, someone is taking the liability of paying for the services up front, so it makes sense that they would want to agree to a contract that locks them in. Otherwise, they may be left with a half-finished job if the price skyrockets. The residential construction market right now, for example, is under tremendous stress due to the high material prices, but from a client's perspective the fixed-price model works in their favor as the contractors have to eat that cost. On the flip side, in the regional world our budgets are pretty much set, all we can do is drain the bucket. Both time/materials costing and fixed price costing have their pros and cons for both the client and company, and its important to weigh job costing systems before starting a project.
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