Cutting Costs With Time & Materials Contracts
And the administrative overhead that accompanies it.
Hey. Welcome to the next edition of Small-Scale Sunday from Brick + Mortar where readers get insight into the acquisition, financing, design, construction, and operations of small-scale real estate development projects.
There are two main ways to price subcontractor jobs: bid or time and materials (T&M).
Each has their own pros and cons:
Bid: Fixed fee; you know what you’re paying for (assuming a detailed scope of work and no change orders); price is padded by the sub to allow for error and greater upside
T&M: You pay for what you get (hourly rates); if poor estimate and job takes longer, you pay a higher price
Properly managed, T&M can save money on smaller projects.
The trick is tracking heads, scrutinizing invoices, and finding trustworthy and competent subs.
I decided to run mostly T&M at 501 Main for three reasons:
I had a solid core team of subs identified in advance,
I knew I could be on site every day with them, and;
Some subs didn’t feel comfortable doing fixed fee given the relative complexity of the project. Instead, they preferred giving a conservative estimate and charging T&M
I also order 75% of all materials.
Some items, especially for plumbing and electrical rough-ins, are ordered (and marked up) by subs. But most materials and finishes I source myself, saving the project thousands of dollars on markup.
The way subcontractor costs are trending for the project, I believe this will work out favorably by the time we finish. I doubt we’ll come in under original estimates, but at least we will have cut costs relative to the alternative bid prices.
For example, before we broke ground, my lead carpenter quoted $270,000 in labor costs for his crew. This was if we did a fixed-fee bid.
But I didn’t have $270,000 to allocate to carpentry labor. I maybe had $180,000.
As a side note, the reason for the discrepancy was twofold: 1) scope changes since his original estimate and 2) the sub padding his costs to account for a fixed-fee contract.
So, we worked up a T&M agreement where I would also join the carpentry crew in an effort to save costs.
Then, if we still ran out of money towards the end of the project, I would just have to let the crew go early and finish on my own. The project is small enough so that I could handle flooring, cabinets, and millwork on my own if needed.
As a result, I pay the carpentry crew based on hours worked. Payday every Friday.
We’re now halfway through the project and I’ve spent $75,000 on carpentry labor.
And I figure we have another $75,000 remaining in labor costs. Most of the complicated framing is completed so this is mainly to cover drywall and finishes.
So, if costs continue as expected, there will have been significant savings over the bid price.
An important part to getting this right is diligence—95% of the time, I’m on site when a sub is there.
Pro tip: Get a WiFi hotspot and bring your laptop to the site. There tends to be more downtime as the day goes on—perfect time to catch up on bookkeeping, researching finishes, placing larger material orders, or planning for future projects. A truck makes for a suitable mobile office and keeps you close to the work.
Most importantly, running T&M jobs requires good tracking.
I keep a daily log of all subs on site in my notebook—when they show up, leave, take breaks, etc. Not overkill, but enough to know whether weekly invoices are appropriate or whether they warrant further discussion.
I’m not going to haggle over an hour or two, but generally want to make sure a guy didn’t take the day off and still log time (hasn’t happened yet).
Some days this becomes a logistical nightmare. Last week, we had 18 guys on site one of the days across four different crews. When this happens, I’ll just make a note every hour or two who’s still on site and who left.
It’s not perfect, but it gives me a rough sense of hours worked per crew.
The other aspect of T&M diligence is vetting material invoices.
Another example—last week I found my plumber had included the automatic washer shutoffs (great insurance policy for if a washer on 2nd or 3rd floor starts leaking) on two different invoices.
At $750 a pop and 8 devices, that’s $6,000 of double charging. I don’t think that was intentional, just oversight. But still—those costs add up if unchecked.
On separate occasions, I’ve also caught one vendor charging sales tax on labor and another charging higher rates than originally discussed. Although I’m fairly certain these were also administrative oversights not shady behavior.
Regardless, not a great look. But not worth getting upset about either (unless it continues). Shit happens, and that’s why it’s important to stay on top of it.
I’ll admit, sifting through time cards and invoices is tedious. Certainly not the most glamorous aspect of construction management.
But it’s a make or break for any project. Even if not relying as heavily on T&M, it’s important to vet invoices and ensure spending is justified.
If you’re considering T&M, you’ll want to allot time every week to tracking hours, reviewing invoices, and then comparing against your notes.
Once you get your systems in place, it starts becoming second nature. At this point, I maybe spend an hour each week tracking time and reviewing invoices.
With the savings from those three invoice errors alone, it has become one of the more high dollar activities I do for my GC business.
Until next time.
— Jonah 🧱
P.S. Want to connect? Find me on LinkedIn and my projects on Instagram.