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Are overhead and profit included in an estimate?

Answered by Jeffrey Anderson ~ September 9, 2013 ~ No Comments

My contractor gave me an estimate, and when it came time to pay, I owed substantially more than anticipated. Apparently in the contract it says there's a 20% upcharge on materials and sub-contractors for overhead and profit. There was already a line item I was aware of for overhead and profit, so I figured all of it was baked into the estimate. Is this common practice among contractors?

-Mike

Jeffrey Anderson

Mike, I can understand your confusion as the estimate sounds like it could be very misleading. There are numerous types of contracts used in the construction industry as many different situations can be encountered. However, the two most common for remodeling projects are "fixed price" and "cost plus" contracts.

A fixed price contract or estimate is just as it sounds: everything described in the scope of work is included in the total amount. That means that the general contractor's overhead and profit are in that figure as well as any costs incurred for materials or having any subcontractors work on the job.

The exception would be any unforeseen issues that weren't covered in the work scope such as the electrical and plumbing overages you mentioned. However, even these shouldn't be a surprise at the end of the job - they should be discussed with the homeowner and an additional amount agreed upon as soon as the contractor discovers there may need to be extra work.

The cost plus type of contract isn't used as much as the fixed price because it requires a little more paperwork by everyone involved. The cost plus states that the customer will pay for all costs associated with the job such as materials, subcontractors, general contractor labor, and equipment rentals. In addition, the contractor will receive an agreed upon percentage of the total cost for their overhead and profit. With this type of contract, the customer should be given a copy of all the invoices the general contractor pays during the course of the job.

Unless there is a lot of trust between the contractor and the customer, such as they've worked together on numerous previous projects, there should be a "not to exceed" amount stipulated in a cost plus contract. There are a few contractors that might take advantage of the situation if this clause isn't in the estimate or contract.

It sounds to me as if your contractor has combined the components of fixed price and cost plus contracts to create your estimate. There is already a line item that shows that an amount for their overhead is included in the total cost for the project and according to your description, it seems there is a percentage on top of that total figure. Unless a customer reads the document very closely, they might miss that overhead and profit seem to be in there twice.

If the document that both you and the contractor signed is considered a legal contract, then this might just have to be considered an expensive lesson learned. However, I suggest you still have an attorney take a look at the estimate to see if there is any way to avoid paying the additional sum. Although if you have already paid it to the contractor, it could require paying quite a bit in legal fees to get it back.

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