General Contractors

[George Foster]

As a general contractor here in the Chicago area. I want my fellow investors to remember when hiring a general contractor, included in the costs of completing your project he/she will charge overhead and profit. So for example, if as one of the line items on your project is the installation of a furnace and a/c and the cost is $5,000 from the subcontractor. If a general contractor is used that cost will now be $6,250. If you are completing a project and you are managing the construction of your project, you will not have to give this $1,250 to the GC.

If you are reviewing potential projects and want the assistance of a General Contractor, remember that this contractor has a very low chance of a job because the investor does not have equitable interest.  If you already own the property and you want a cost estimate, now this is business as usual for the GC because competing for business is what normal businesses do.

This is a snippet from an estimate that I provide on a project. If someone wants general information to help them make a bid, I typically give a ranges to help them assess if a deal is worth pursuing. I only need to see pictures to determine a possible range for the project's completion. When completing a more detailed estimate, a contractor can spend upwards of 8 hours to do this. 

I will admit, I tend to be a bit detailed when completing estimates and some investors don't care for this. I do this because I have to protect my margins and I need to have accurate information to keep my bids relevant and accurate. I am always open to helping anyone but as long as it does not take away from my ability to make money for my company.

[George Foster]

@Julia Blythe  the first thing that I will tell you is that all general contractors have different margins and overhead expenses thus the 10% Profit & 10% Overhead does not work for all contractors. A general contractor would have to determine what their volume of business will be and the associated expenses so that an accurate Profit and Overhead % can be added to each bid so that overhead can be covered and an appropriate profit is garnered based on each contractor's business model.

The second thing I want to say is that there are different types of contracts that a contractor and client can enter:

1. Fixed Price

2. Time & Materials + a Fee

3. Hybrid of the above two

There is an article that you can read that will give you a very good explanation with the advantages and disadvantages of each.

Construction Contracts: What to Know About Estimates vs. Bids

It sounds like you had a fixed priced contract with the general contractor. If this is the case, the contractor is providing services for a fixed price. As long as there are no issues associated with uncovered issues once walls come down or changes in the contract due to client changes the job should be able to be done for what the contractor bid. If there are issues that the contractor under estimated for those things that could be seen and not bid the contractor will have to eat those costs. If the contractor is able to negotiate more favorable materials or labor that is a bonus for the general contractor. That is the benefit or advantage for the general contractor and not the client. If you were to do a time and material contract, then you would pay for only the material and labor it takes to do the job. It is more transparent. The GC did not deceive you, he/she was in their right to take the advantages of the contract he/she had with you. If this was a time and material contract you would benefit from any savings in material and labor. If a contractor were to pass the discount that he/she gets in a fixed priced contract along to you, that is a decision that the general contractor made one that is his/ or her option to do. 

I hope this helps you understand the process and differences in contracts. Please read the link provided so that you have a better understanding so that you can be in control of an arrangement you feel benefits your situation.