1. Where’s the Profit? Profit Strategies
on Cost Plus Contracts
John L. Bailey
Veritas Advisory Group, Inc.
1601 Elm Street, Suite 3600, Dallas TX 75201
214.720.1995
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2. Texas A&M Stadium Expansion
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3. Texas A&M Stadium Expansion
 Planned Scope
 $300 Million Total Construction Costs
 3 Year Schedule
 Phased Construction Between Football
Seasons
 Public Bid for Construction Manager-At-Risk
 Lowest Bidder was a Manhattan-Vaughn Joint
Venture
 Total Fee $3.5 Million, or ~1.2% of
Construction Costs
3

4. Example of Typical Home Office
Overhead
KBR Income Statement (in millions)
2009 2010 2011 3 Year Total
Total Revenue $12,105 $10,099 $9,261 $31,465
Cost of Revenue $11,348 $9,273 $8,463 $29,084
Gross Profit $757 $826 $798 $2,381
Gross Profit Percent of Revenue 6.25% 8.18% 8.62% 7.57%
Selling General and Administrative $217 $212 $214 $643
SGA Percent of Revenue 1.79% 2.10% 2.31% 2.04%
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5. Example of Typical Home Office
Overhead
Home Office Overhead Expenses
Sum of 2006 Sum of 2007 Sum of 2008 Sum of 2009
Wages $2,949,258 $3,985,918 $8,070,145 $7,460,035
Benefits $630,724 $141,562 $561,429 $1,271,974
Employee Recruitment $507,272 $325,866 $225,134
Consulting $191,668 $275,541 $628,061 $447,584
Insurance $406,945 $583,870 $1,027,830 $669,118
Janitorial $14,638 $14,971 $15,273 $24,508
Maintenance $100,037 $123,702 $197,520 $201,613
Office Supplies / Postage / Misc. $625,082 $553,958 $911,705 $475,691
Rents & Leases $280,266 $361,202 $602,600 $649,647
Taxes $443,914 $1,111,097 $1,426,565 $1,502,763
Telephone $271,805 $326,521 $477,996 $486,873
Travel $525,162 $710,828 $899,863 $739,842
Utilities $109,125 $111,400 $197,716 $198,996
Grand Total $6,548,624 $8,807,842 $15,342,569 $14,353,778
Total Yearly Billings $57,745,370 $87,866,624 $134,843,034 $108,109,966
Percent of Yearly Billings 11.34% 10.02% 11.38% 13.28%
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6. Potential Explanation for Low
Stated Fee
 High Profile Project with Marketing Benefit
 Relationship Building in Anticipation of Future Work
 Contractor Only Attempting to Cover Otherwise Idle Employee
Costs
 Shared Savings Clauses
 Incentive Bonuses
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7. Potential Areas for Profit Recovery
 Labor Costs
 Equipment Costs
 Self-Performed Work
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8. Labor Rates vs. Costs
 Rates vs. Costs
 Rates may simplify billings.
 Potential billings are understood by both parties
 Areas of Concern:
 Do rates reflect actual costs?
 Do all positions include rates or include provision to fairly assign
rates?
 How are rates defined for salaried employees?
 Is overtime included within the rate?
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9. Definition of Allowable Rates
 Wages of the construction workers employed by the
Contractor to perform the construction of the Work shall
be charged as a Cost of the Work at the hourly wage rates
for construction workers set forth in the billable wage
schedule attached hereto as Exhibit A.
 In lieu of the costs paid or incurred by the Contractor for
taxes, insurance, contributions, assessments and benefits
required by law or collective bargaining agreements and,
for personnel not covered by such agreements, customary
benefits such as sick leave, medical and health benefits,
holidays, vacations and pensions for construction workers
shall charge, as a Cost of the Work, a flat labor burden
rate of 50% of the hourly wage rate wage applicable to
each construction worker as set forth in Exhibit A.
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10. Exhibit A Wage Rate Schedule
Position Base Labor Burden @ 50% Total Labor
Rate Rate
Laborer $21.00 $10.50 $31.50
Carpenter $34.80 $17.40 $52.20
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11. Profit on Billing Rates
Example of Actual Employee Cost:
Position Base Wage Burden (48%) Total Employee
Rate Cost
Laborer $14.00 $6.72 $20.72
Carpenter $20.00 $9.60 $29.60
Comparison of Costs to Billing Rates:
Laborer Carpenter
60 60
$52.20 Billing Rate
55 55
50 50
Amount (Dollars)
Amount (Dollars)
45 45
40 40 $22.60 Profit
35 $31.50 Billing Rate 35
30 30
25 $10.78 Profit 25 $9.60 Burden
20 20
$6.72 Burden
15 15
10 10 $20.00 Base Wage
$14.00 Base Wage
5 5 11

12. Profit on Billing Rates
Profit on Overtime Rates:
1.5X Billing Rate,
75 or $78.30
70
65
60
Amount (Dollars)
$52.20 Billing Rate $43.80 Profit
55
50
45
40 $22.60 Profit
35 $4.50 Burden on OT
30 (15%)
Burden
25 $9.60
(48%)
20
$30.00 1.5x Base
15
$20.00 Base Wage Wage
10
5
Regular Time Overtime 12

13. Limiting Labor Rate Profit
 Personnel Costs. The actual Worker Wage Rate for
Contractor’s hourly employees and the Monthly
Salary Rate of Contractor’s salaried personnel who
are identified to Owner in advance and in writing but
only for the time actually stationed at the Project site
with Owner’s prior consent. The Project Manager’s
Monthly Salary Rate may be included in the General
Conditions Costs only when the Project Manager is
directly located on and managing the Project. All
personnel costs are subject to audit to determine the
actual cost of the wages, salaries, and allowable
employer contributions incurred by the Contractor for
services performed for the Project.
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14. Limiting Burden Related Profit
 In lieu of the costs paid or incurred by the
Contractor for taxes, insurance, contributions,
assessments, and benefits required by law or
collective bargaining agreements and, for
personnel not covered by such agreements,
customary benefits such as sick leave, medical
and health benefits, holidays, vacations, and
pensions for construction workers shall charge,
as a Cost of the Work, a flat labor burden rate of
__% of the hourly wage rate wage applicable to
each construction worker for regular time hours
and a flat labor burden rate of ___% for overtime
hours. Actual burden rates are subject to audit
by the Owner at each year end.
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15. Classification of Employee
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16. Classification of Employee
 To the extent the worker’s position is not
identified in Exhibit A (Wage Rate Schedule),
written approval of the employee’s position
and billing rate must be received prior to
billing the Owner for employee’s work hours.
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17. Billing Salaried Employees
 Typical Wage Rate Calculation
Position Salary Hours Rate
Project $52,000 52 Weeks x $25.00 / HR
Engineer 40 Hours
 Assuming the project engineer actually works
50 hours per week
Position Rate Hours Amount
Worked Billed
Project $25.00 / HR 50 Hours $1,250
Engineer
 10 Hours billed to Owner with no cost to
Contractor 17

18. Billing Overhead Costs
 Contract Language Allowing Home Office
Costs:
 Wages or salaries of Design-Builder's
personnel stationed at Design-Builder's
principal or branch offices and performing the
functions as set forth on Exhibit "C". The
reimbursable costs of personnel stationed at
Design-Builder's principal or branch offices
shall include a Ten percent (10%) markup to
compensate Design-Builder for the Project-
related overhead associated with such
personnel. 18

19. Billing Overhead Costs
 Home Office costs can be avoided if they are
instead billed directly to the Project as a Cost
of Work
 People: Owner’s Costs, Project executive,
Accounting, HR, Computers, Bonuses, etc..
 Expenses: allocation of expenses such as
computers, phones, etc..
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20. Profit on Billing Rates
Profit on Temporary Labor:
60
55
50
Amount (Dollars)
45
40
35 $31.50 Billing Rate
30
25
$16.50 Profit
20
15
10 Base Wage
$15.00 (No Burden
5
Incurred)
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21. Limiting Profit on Temporary
Employees
 Construction supervisors and workers that
are not direct employees of the Contractor
and are utilized by the Contractor in its Work
shall be billed to the Owner at the actual
costs incurred by the Contractor.
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22. Contract Language – Equipment
Billing
 Rental Charges not defined:
 Rental charges and the costs of
transportation, installation, minor repairs and
replacements, dismantling and removal of
temporary facilities, machinery, equipment and
hand tools not customarily owned by the
workers, which are provided by Design-Builder
at the Site, whether rented from Design-
Builder or others, and incurred in the
performance of the Work.
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23. Contract Language – Equipment
Billing
 Rental Rates Defined:
 Rental Charges for temporary facilities,
machinery, equipment, and hand tools not
customarily owned by construction workers that
are provided by the Contractor at the site, whether
rented from the Contractor or others, and costs of
transportation, installation, minor repairs, and
replacements, dismantling, and removal thereof.
Rates and quantities of equipment rented shall be
in accordance with the Small Tool Rate Schedule
attached hereto as Exhibit B.
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24. Exhibit B Equipment Rates
Equipment Description Monthly Rate
4x4 Truck $1,575
Lighting Station $1,320
Radios $85
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25. Actual Equipment Rates
Description Actual Cost Billable Rate Profit
4x4 Truck $600 $1,575 $975
Lighting Station $825 $1,320 $495
Radios $40 $85 $45
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26. Limiting Equipment Billing Profit
 Rental charges for temporary facilities, equipment, and hand
tools (except those customarily owned by construction workers),
supplied to the Project site by Contractor, provided they are
included in the list of allowable General Condition line items and
Owner has approved the rentals and the rental rates in advance
and in writing. Rental rates may include transportation,
installation, minor maintenance costs, and removal costs. For
tools, machinery or construction equipment rented directly from
Contractor, the rental rate, including freight and delivery costs
and all operating expenses except labor, shall be approved in
advance by Owner and shall be in accordance with the “Rental
Rate Blue Book for Construction Equipment” published by
Penton Business Media dba Equipment Watch, latest edition,
but no higher than the prevailing competitive rates for rental of
similar equipment in the Project vicinity.
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27. Self Performance of Work by the
General Contractor
 Bidding Requirements to demonstrate
reasonableness of price
 Potential of Separate Accounting Record
Requirements for each scope of work
 Owner Access to both sets of books
 Controls to assure contractor costs find
proper books
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28. Potential Impact of Hidden Profits
 Contract - $145 Million
 Stated Fee – 4%, or $5.8 Million
 Additional “Hidden Profits” - $2 Million
 Added Fee – 1.4%
 Increased Fee by 35%
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29. Defining Fee Components
 Fee includes, but is not limited to the following
items
 Profit
 Financing Costs
 Bonuses, Incentives, Rewards, Stock Options, etc.
 Salaries of personnel not stationed at Project
 Relocation, Travel, and Per Diem Expenses
 Home or Regional Office Overhead and Expenses
 All other expenses not specifically defined as
allowable.
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30. End of Contract Audit Provisions
 Allows for review of billed costs to check
conformance with Contract
 Include production of actual job cost report,
not just billing report
 Include production of general ledger
 Taking advantage of the final audit can be a
cost effective way of ensuring the amount
paid is appropriate
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31. Veritas Advisory Group Overview
 Business and Construction Consulting Firm
 Focus on Dispute Resolution
 Dallas-Based Firm with a National Practice
 Provide bot cost and schedule analysis within
construction-type matters
 Principals have over 25 years experience
 22 Full Time Consultants
 Engineers
 Certified Public Accountants
 Financial Analysts/MBAs
 Construction Industry Professionals
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