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Speaking Out

Itemization Aids Owner in Evaluating Bid

July 25, 1993|D. D. HATHAWAY | SPECIAL TO THE TIMES

As a contractor specializing in residential remodeling, I frequently encounter the following questions:

How does a homeowner know if bids they have gotten are either too high or too low? Has a contractor figured all the necessary costs into a bid? How much money is the contractor making, above the costs of the material and labor?

To help answer these questions, I submit my bids in an itemized form, and I would suggest that homeowners getting bids on construction or remodeling projects require their bidders to do the same.

An itemized bid can help ensure that all costs have been figured, and that the contractor won't at some later point bill for items the homeowner assumed were included. This cost breakdown also helps weed out the inexperienced or incompetent contractor who has submitted a suspiciously low bid.

This cost breakdown should include labor, material and subcontractor charges for each phase of the job. For example, in the category of plumbing, the bidder should list any direct labor costs, the price of the plumbing fixtures, and the charges by the plumbing contractor.

Or, in the category of rough framing, the bidder should itemize the cost of the carpenters' labor, the lumber, the hardware, and the structural steel, if any.

The more specific this cost breakdown, the more easily homeowners can analyze their bids, possibly with the help of their architect, and assure themselves that everything has been included. To the contractor's benefit, this itemization can help instill a sense of trust, a feeling that the contractor is thorough and concerned with the myriad of details in every construction job.

The bidder's breakdown of costs should include the two most mysterious elements of a contractor's charges--overhead and profit.

Profit is simply the income to the company, or in the cast of a sole owner, such as myself, my salary. Overhead is every expense involved in running the business that does not directly arise from a specific job.

For a typical bidder, overhead would be worker's compensation and liability insurance, vehicle insurance, payroll taxes, gasoline and oil, telephone, stationery, postage stamps and the variety of other expenses involved in maintaining an office.

Why should a homeowner be concerned with the amount of bidder's overhead? Because any two contractors with similar operations should have a similar overhead, and if one bidder's figure is much lower than another's, the homeowner should be suspicious, because this contractor may be paying his employees under the table, and thus avoiding the high costs of worker's compensation and payroll taxes.

For example, my last year's worker's compensation premium was $24 for every $100 of payroll. In addition, for each $100 paid to employees I paid the state and federal government just over $11 in employer's contributions to Social Security, unemployment, and state disability insurance. With an annual payroll of $80,000, this meant I had to pay $35,000 in addition to other overhead expenses prorated over the year.

A contractor without insurance can be a hazard because an injured worker not only lacks protection, but may be able to seek damages from the homeowner. And a contractor paying cash means that the employees are not qualifying for Social Security or unemployment compensation, to say nothing of the fact that all of us pay higher taxes to make up for those who evade this responsibility.

My own overhead is currently 14% of job cost, which is labor, materials, and subcontractor charges, and it could be significantly higher if I didn't have my office in my home and do all my own book work. If a homeowner encounters an overhead percentage greatly lower than this, I would suggest an investigation into whether or not the contractor is paying employees on the books.

Finally, how can a homeowner tell if the profit figured by a contractor is reasonable and fair? I once was told that I had lost a job because my projected profit was higher than another bidder's, even though our bid totals were very close.

In that case, I knew the other bidder to be a contractor whose volume was much higher than mine, and thus could charge a lower profit, although I didn't care much for the homeowner's reasoning in rejecting my bid. I can only speak for myself and say that I decide how much I need to earn each year and then derive a percentage that I can apply to each job.

This is an inexact science, and means that if my gross increases my earnings increase, and vice versa. In practice, I usually adjust the profit figure for each job, depending upon its complexity, how badly I want it, and how competitive I think the bidding is going to be.

The only constant is that the real profit I make on each job is usually smaller than the amount I have envisioned on the bid breakdown given to the client.

Hathaway is a general contractor in Los Angeles.

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