Definitions

What is an ‘open-book’ building contract?

In an open-book contract, we the builder and the client agree on:

1. Which costs are remunerable (these are usually the material costs) and
2. The margin that we, the builder, will mark up these costs (this is often 5% on material costs). The project is then invoiced to the client based on the actual costs incurred plus the agreed margin.

The benefit of carrying out a project on this basis is that the client can then change the specification of material items such as flooring or fixtures and fittings at any point in the project easily and without any changes to the contract.

First fix and second fix, what do they mean in a building project?

First fix consists of all the work that is required as far as putting the plaster on the internal walls. This includes installing walls, ceilings and floors as well as installing wiring for the electrics and pipes for water.

Second fix comprises all the work after the plastering of the walls.  For example the installation of  sinks, baths and taps connected to the pipes, doors fitted into doorframes, kitchen units fitted into kitchen spaces and light fittings, sockets or switches connected to electrical outlets.

It is often useful to split a project into first and second fix as the cost of first fix is usually easier to price for, while second fix will depend on what items the client wishes installed. For example bathroom fittings such as a bath and WC, could be purchased for from £200 to £2,000 and a single light fittings could be a plastic pendant with a light bulb to a chandelier with many bulbs! Second fix costs will thus vary a great deal depending on the final spec that a client chooses.

For this reason projects are sometimes priced up to first fix only. If a price for second fix is required a much higher degree of specification is needed by the builder. They will need to know exactly what type of bath or light fitting you intend to install to give an accurate quote.

Fees Charges

Building project payment structure

For flat refurbishments, side extensions, house refurbishments, loft conversions and other building projects we will estimate a total project cost based upon your specifications. The cost of the project is usually divided into two parts: labour and materials.

Payment for the project is then divided into equal weekly or monthly payments usually with a retainer (a percentage held back until completion of the project) and up font payment (a percentage payed before the project starts). The value of these payments depends very much on the size of the project and the speed in which it will be completed.

An example might be:

Consultancy, research and pre project fees

Before a building project starts we sometimes need to recoup some of costs if the pre build stage of the project will be time consuming or requires time spent with architects, the local council, planning, costing or researching projects.

For these professional services we charge the following fees:

Attending a 1hr meeting in London – £75

Visiting a project site in London – £75

Per hour office based research, consultancy, liaising with councils, architects, engineers, per email or phone call – £65

Initial email or telephone consultations are usually free, as are costings relating to new projects, however if these become very time consuming before a project starts, we will in rare cases need to charge our £65 per hour fee, as described above.

We do not value or do costings for speculative projects, except under exceptional circumstances.

Prices for additional costings or pricing of projects (after an initial free costing) vary a great deal but they might be from £200 for a small project to £1,500 for a larger project.

How VAT works on materials for an open book project.

An open book project means that we pass our material cost onto the customer, usually with a mark up of 10%, this is to cover our administrative time purchasing, organising delivery and receiving the delivery on site. Any trade discounts we receive (for example on most kitchens) we pass on our discounts, of up to 80%, to clients.

On an open book project VAT is calculated as follows:

If we buy materials for £120 inc. VAT then we invoice the customer £100 + £20 in VAT.

HMRC view this transaction as a sale of the materials to our customer and we pay them £20 (20%) in VAT on our invoice to the customer.

We then claim back £20 from HMRC for the materials. (For labour we can’t claim back the 20%.)

Summary

We buy materials of £120 inc. VAT
We invoice customer £120 – £20 goes to HMRC
We claim back £20 from HMRC

We have spent and invoiced £120 – £20 (goes to HMRC) + £20 (claimed back from HMRC) = £120 cost to us
Cost to customer of invoice = £120 inc VAT + any mark up we have agreed

Here is HMRCs explanation:

http://www.hmrc.gov.uk/vat/start/introduction.htm#3