Project Management Fees in AU Residential Building

What it is

A project management fee is the amount a residential builder charges to run the job over and above the cost of the work itself. It pays for the builder's site supervision, scheduling, subcontractor management, document control, safety oversight and the office overheads that keep the business running.

In Australian residential work the fee is most visible on cost-plus contracts and on construction management arrangements. On lump sum contracts it is baked into the price and called margin or overhead and profit. The substance is the same.

How it is charged

There are two common structures in AU residential work.

Percentage of contract value

The builder charges a fixed percentage of the total cost of works. This is the default position in the HIA Cost Plus Contract. If the parties do not specify a percentage in that contract, the default builder's fee is 20 percent of the cost of building works.

Percentages in residential cost-plus contracts in AU typically sit between 15 and 25 percent. A small renovation builder running tight project loads usually charges at the higher end. A volume builder running a high turnover at low overhead can run lower. Custom builders doing one or two complex jobs at a time often sit at 20 to 25 percent.

The advantage is simplicity. The fee scales with the job. The disadvantage from the owner's side is that there is no cap and the builder has no incentive to drive cost down.

Fixed fee

The builder agrees a dollar amount for project management regardless of what the work costs. The HIA Cost Plus Contract allows this as an alternative to the percentage. A fixed fee can be a single number for the whole job or a monthly amount tied to the program.

Fixed fees suit projects where the scope is reasonably well defined but the cost of trades and materials is volatile or where the owner wants to remove the perverse incentive of a percentage. The builder takes on more risk if the job runs long and gets the benefit if it runs short.

Hybrid

Some builders charge a base fixed fee plus a smaller percentage of trade and material costs, or a percentage with a cap. These are negotiated structures and need to be drafted carefully so the calculation method is unambiguous.

What the fee covers

The fee is meant to cover everything the builder does to run the job that is not the physical work itself. That includes:

• Site supervision and the supervisor's time
• Programming, scheduling and progress reporting
• Subcontractor selection, engagement and management
• Document control, RFIs and variation administration
• Safety and WHS compliance
• Insurance premiums (subject to contract)
• Office overhead allocated to the project
• The builder's profit

What it generally does not cover is project fees and statutory charges. Generally builders do not apply their margin to project fees and charges. Council fees, water authority headworks, certifier fees and similar pass-through costs are usually billed at cost without margin, though GST still applies on the on-charge.

When to charge a percentage versus a fixed fee

Three factors push toward a percentage.

The job is large or complex with high scope uncertainty. A custom architectural home with a long client list and active design changes will throw up variations every week. A percentage scales with that work.

The owner wants transparency on every cost. Cost-plus with a percentage suits owners who want to see every invoice and trade the simplicity of pricing for visibility on margin.

The builder is taking on programme risk on a long job. A percentage gives the builder some buffer if the job extends.

Three factors push toward a fixed fee.

The scope is well defined and the owner wants budget certainty on the management cost. A small extension with a tight plan and known trades is a good candidate.

The owner is sophisticated and wants to remove the incentive to inflate cost. Architects and developers running their own residential projects often push for fixed fees on construction management arrangements.

The builder has strong programme confidence and can carry the fixed fee on a known duration.

GST and tax treatment

Project management fees are subject to GST in AU residential work and must be shown on tax invoices. Under ATO rules a builder registered for GST charges GST on the management fee component just as they would on the rest of the contract value. The same applies to fixed fees and percentage fees alike.

For builders running a separate construction management entity that contracts directly with the owner outside a building contract (sometimes used for project management of an owner-builder arrangement), the GST treatment is the same but home building compensation insurance and licensing rules may differ. Builders in this position need to check their state licensing regulator before quoting.

What a reasonable AU residential PM fee looks like

For a typical custom residential builder running two to four jobs at a time, a project management fee of 18 to 22 percent on cost-plus, or a fixed monthly fee of 6 to 10 percent of expected total cost spread across the program, is a defensible range. Numbers outside that range are not wrong but need a reason. A builder charging 12 percent is either subsidising or working at volume. A builder charging 30 percent is either small, very specialised or under-pricing the trades and over-pricing the fee.