Salary as a flipper's project manager, or run my own crew at cost plus 18. Stuck between two offers

18 percent cost-plus on residential rehab is thin, and it's thinner than it looks because it's 18 percent of costs, not 18 percent of contract price. 18 on cost is a 15.3 percent gross margin on the total. I ran a crew at 22 on cost and still gave back three or four points a year to warranty work and jobs that ran long. If direct labor is inside the cost base, 18 is workable. If it's outside, walk. Get it written as a definition of "cost of the work" with a list of what's included, that's a standard clause and there's no reason he should resist it.

I hire crews on thin-margin flips and I'll tell you what I do, which is not flattering to me. When my acquisitions slow down my crew hears about it the same week they run out of work. No notice, no retainer. If that guy's volume drops from 16 to 8 you're carrying three men on payroll on a promise.

Numbers. Option two with labor inside the cost base: $736k volume, $132k fee, minus GL and workers comp, minus truck and tools, minus phone and software and an accountant. Comp rates on carpentry classifications are not small, and depending on your state that's a meaningful percentage of payroll, but if it's in the cost base the client pays it. Call it $30k of true overhead you can't bill. You're at roughly $100k of pre-tax profit for more risk than the salary. Option two with labor outside: three men at say $58k loaded each is $174k against a $132k fee. You lose money before you get out of bed. So @girder has the whole thing right, the definition clause is the deal.

Is there a non-compete or a non-solicit in the salaried offer? Twenty jobs a year of relationships with subs is the asset you'd be building, and I'd want to know whether you can take it with you.

Basic question I'd rather ask here than in the meeting. On cost-plus, who checks the receipts, and how often does that turn into an argument? Does the investor get to see what your supplier discount is, and if he sees you buying at 20 off list does he expect the 18 percent to come off the discounted number?

@compass that's the thing that killed cost-plus for a guy I know. His client started asking for supplier invoices, then started asking why the invoices had rebates on them. Ended up switching to fixed price bids just to stop the conversation.

Whose license does option two run under? If you're the one contracting with the owner for the whole scope, you're likely the general contractor for licensing purposes, and licensing thresholds and what triggers a GC license vary by state and sometimes by city. Also worth knowing whether that state treats you as an employee or a contractor for the salaried role, which is a separate question with its own rules. Both of those are questions for a licensed professional in your state, not for us.

Scope creep is my whole life, so let me explain where the 18 percent actually goes. Client walks the job at week three, wants the wall opened up, says "just take care of it, we'll square up." You take care of it. Four hours of two guys, a header, a permit revision. Nobody writes it down. That happens eleven times across sixteen jobs and it's your entire profit. The clause I'd fight for over everything else: no work proceeds on a change without a written and signed change order, and the change order carries the same 18 percent. On the salaried side the equivalent problem exists too, you just eat it in hours instead of dollars.

The salary has a floor and the crew doesn't. That's the entire difference to me.

Depends where you are too. Out where I look, there are maybe four crews that'll do a full rehab within an hour's drive and all four are booked out months. If that's your market, being the crew is worth more than being someone's employee because you can price like a scarce thing. If you're somewhere with fifty crews the leverage flips.

I'd take the salary for two years and treat it as paid education. You learn his sub list, his supplier pricing, his budget templates, and what actually goes wrong on 40 houses. Then you go build your own thing with a client list instead of one client. Slow, but you don't spend the two years worried about payroll.

@orchard that assumes he still has a job in two years. A flipper doing 20 a year is one bad quarter from cutting the salaried PM, and the PM is the biggest line item that isn't attached to a specific house. I've watched exactly that happen. At least on the crew side you can chase other clients the same week.

Sideways question, sorry. How does someone doing 20 flips a year find a person like @plumb in the first place? I'm building a list of people to call before I buy anything and crews are the part I have no idea how to source.

@bramble supply houses and the permit desk. The counter guys at a plumbing or electrical supply know who buys steadily and who pays, and the permit clerks know who files clean applications. That's not a deal referral, it's a filter.

Naive one. If plumb takes the crew option and the investor doesn't pay, he files a mechanic's lien, right? And if he takes the salary and doesn't get paid, he's just an unpaid employee with wage claims? Those seem like wildly different levels of protection and nobody's mentioned it.

@vellum I had the same thought reading it. Lien rights sound like the stronger position on paper but from what I've read the deadlines are short and vary by state, so it's only strong if you're organized about notices from day one.

What's your breakeven job count on option two? If loaded crew cost plus true overhead is around $200k a year and the fee is $8,280 a job at $46k of cost, you need about 24 jobs, which is more than he's offering. Unless labor is inside the cost base, in which case breakeven is maybe five jobs. That gap is so large that everything else in this thread is secondary until you get that one sentence written down.

Warranty is the one that got expensive for me as an owner. Who pays when the buyer of the flip calls eight months later about a leak at a shower pan your guy set? On cost-plus with no warranty language you'll be asked to fix it for free out of goodwill, and goodwill on 16 jobs a year adds up. Get a stated warranty period and a stated exclusion for owner-supplied materials.

Salary, written bonus formula, done. You can always start the crew later with money in the bank. Starting it now with one client and three payrolls is the exciting version and I don't think exciting is what you're after.

Genuinely new here, what does cost-plus mean? Is it that the client pays every receipt and then you add 18 percent on top of the total?

@rigging yes, that's it. Client reimburses the actual cost of the work and pays a fee on top, here 18 percent. Opposite is a fixed bid where you name one number and keep whatever's left, or eat the overage. @plumb, the ceiling on option two isn't the fee percentage, it's how many jobs three guys can physically run. I hit that wall in my own business. Sixteen at once is not the same as sixteen a year, so ask how many he wants running simultaneously.

The contractor associations put the industry worker shortfall somewhere in the hundreds of thousands, and that's before you narrow it to guys who'll show up on a rehab schedule. If that's real then a functioning three-man crew has more pricing power than 18 percent reflects. I'd counter at 20 and see what happens.

Price the client concentration. One client at 100 percent of revenue deserves a premium over the same work spread across five clients, because you're taking his acquisition risk on top of your execution risk. @pike's 20 is one way to charge for it. Another is a minimum volume commitment with a stand-by payment if he drops below it. He'll say no, and his reason for saying no will tell you how confident he is in his own pipeline.

Is the project manager job different from being the general contractor, or is it the same work with a paycheck instead of a contract? I want to be clear on that before I answer.

@juniper the general contractor holds the contract and the risk, the PM runs the schedule and the people for whoever holds it. Same days, very different downside. @plumb, has anyone put a dollar value on the health coverage? For a family plan that can be worth a meaningful chunk of the salary difference, and it's the line people forget when they compare an employee offer to a business.

Go find whatever draft agreement exists on option two and read the payment timing clause before anything else. If it says you're paid within X days of the owner receiving funds from his lender, you're subordinate to a lender you have no relationship with, and a slow draw inspection becomes your payroll problem. Also look for retainage. Ten percent held to final on every job means roughly $13k of your money is permanently parked as long as you're working for him. Whether retainage is even enforceable at that level on residential work varies by state, so ask an attorney there.

Five guys on my payroll and I've been the person on both ends of this. My numbers, for whatever they're worth: I run cost-plus at 20 with labor fully inside the cost base, and after comp, GL, truck, tools and a part-time bookkeeper my actual take is a bit under half the fee. Change orders are where the year gets made or lost, exactly as @harrow said. What I'd do in your seat: take the crew deal only if you get labor inside the cost base in writing, a signed change order requirement, and permission to take other clients. That last one is the real answer to @flint and @quarry both. A crew that's allowed a second client survives a slow quarter. A crew that isn't, doesn't.