Incentives for keeping contractor/GC motivated to keep bids low?

[Nick O.]

Contractor currently charges % on total spent which gives him no motivation to keep bids low or fight for better deals with subs/suppliers. Wanted to get some ideas on how I can incentivize him to be motivated to get the job done for as low as possible without obviously cutting corners. Was thinking maybe paying him a % of the total job plus a % of profits but I've hear pro's and cons about giving a % of profits. Another idea was offering a bonus for coming under budget but wanted to see what amount of money would make most sense. Any feedback would be greatly appreciated!

[Matthew Olszak]

I wouldn't be interested in a cut of the profit. This is your deal, you get the majority of the potential reward so why should I take the risk that you miscalculated your comps and now have to sell at cost?

Treat your contractor as a member of your team. Don't piecemeal the job, get a flat number for materials and labor - any costs over which are within the scope of work is the contractor's risk, any costs under is the contractor's reward for taking that risk. 

If I am a great negotiator and have great connections to subs, that allows me to be more competitive, but doesn't mean I'll pass on all of the savings to you - we'll share that with a low bid. Its the equivalent of what you do with a flip. If you have awesome skills to find the deals, awesome connections with contractors to get the work done cheap, and awesome folks that lend to you at low rates, would you sell the home for way less than the market just because it cost you less? No - maybe a hair less to make it stand out, but you wouldn't leave money on the table just because you've perfected your business.

Consider also that money shouldn't be your only concern - time and quality are important too. If you cut the price down too much, you can't expect it to be a priority, and that time costs you money. 

A huge incentive for me on jobs is that I'll be paid quickly, per the contract, and not nickled and dimed. 

Examples: Being told I have to wait for your financing to approve prior to payment, but never having discussed this prior to commencement of work. Or holding back huge amounts for punch list items, like holding back $1k for a crooked light switch plate because that means the electrical "technically" isn't complete. The first breaks our trust because this issue was known upfront but wasn't discussed (holding your debt also costs me money), and the second breaks our trust because you don't trust me enough to believe I'll actually correct the issue if I get paid.

If I know you pay quick, are honest, don't try to screw me when I need to present a change-order, and allow me to make my profit, I'm very motivated to fight hard to earn your work through competitively priced bids. In fact, my I can reduce my overhead/profit number because I'll be comfortable I won't incur surprise costs like having to eat a $2k change order for unknown circumstances or having to pay interest on your $10k material bill because you won't pay me for 45 days. Also, when I present my bid, if I know you'll always counter at 10% under no matter how fair it is, I'll up my bid by the appropriate amount. If the price is honest, building the long-term relationship saves you more than the 2% you want to scratch off my bid.