When calculating your roofing contract price, you want a formula favorable to your profit margins. What construction contract should you go for if you are confident about keeping below estimated costs and within the given time schedule?
Cost plus variable fee contracts offer incentives either on top of a fixed fee, or as a percentage of the cost. This can afford you a handsome bonus in your pocket. In this guide, we walk you through how you can capitalize on a cost plus variable fee contract.
How to set your roofing contractor price for a cost plus variable fee?
Cost plus variable fee contracts have a simple premise:
- Do the work at a fixed fee and keep costs below estimated budget costs. Share the cost savings with the project owner based on a percentage ratio (reward). Exceed estimated budget costs, deduct overruns from your fixed fee (penalty). This is the cost plus fixed fee and award variant of the cost plus variable fee contract.
- Do the work to meet a target cost and earn a target fee, with a minimum and maximum deviation from target cost and target fee. If project is completed below target costs, share cost savings with project owner. If maximum allowable costs are exceeded, there is a decrease in target fee paid to the contractor. All these are calculated using a pre-defined slider-rule formula. This is the cost plus incentive fee variant of the cost plus variable fee contract.
As a competent contractor with a solid track record of completing projects on schedule and within budget, you can stand to earn a neat bonus. The general rule for the cost plus award fee contract is cost savings are shared fifty/fifty with the project owner. For every dollar you save on the roof construction costs, you keep 50 cents.
As a rule, the percentage for sharing the penalty/ bonus is usually 50/50. Generally speaking, the law does not recognize a penalty-only contract.
What are the drawbacks?
When you set your roofing contractor price, if your budget estimates are off, or if for reasons beyond your control you cannot complete the project on schedule, then you will most likely be penalized and lose money.
What should you consider when negotiating a roofing contract price?
A cost plus variable contract can widen your profit margin on your roofing contract price. However, if materials and labor costs are volatile in an unstable supply market, you may wish to consider another contract type. Since your margins are dependent on cost estimates, a sudden increase in materials costs before construction is completed, may put you above budget and attract penalties,
How useful is Liability Cover for a cost plus variable fee contract?
Roofing Insurance Coverage will pay for all third-party claims brought against your company. These include claims brought against you by your client or other third-parties in case of damages or accidents. Since your profit is variable, a liability cover provides a safety net. For more information on how to get the right Roofing Insurance Coverage contact us at Contractors Liability on 888-676-0923