In construction contracts, the fee is the amount a contractor earns for overhead and profit on top of the reimbursable cost of the work, most often on cost-plus, GMP, and construction management contracts.
Plan reviews connect field conditions, drawings, and the next decisions on a job. AI-generated illustration.
On a lump sum contract, the contractor's overhead and profit are buried in the price, and nobody asks to see them. On a cost-plus contract or a GMP contract, the owner pays the actual cost of the work plus a separate fee. The fee covers the contractor's home office overhead and profit. Everything else is cost, and the contract defines exactly which costs count.
Common fee structures
How construction fees are usually set
Structure
How it works
Where it shows up
Percentage fee
A percentage of the cost of the work, so the fee rises with cost
Cost-plus residential and commercial work, GMP contracts
Fixed fee
A set dollar amount that does not change unless scope changes
Cost-plus-fixed-fee contracts, many federal cost-type contracts
Incentive or award fee
A base fee plus a share of savings or a bonus tied to performance
Larger GMP and federal contracts
Preconstruction fee
A separate fee or lump sum for services during design
CM at risk and design-build
Federal law sets ceilings on some fees. FAR 15.404-4 limits the fee on cost-plus-fixed-fee contracts to 10 percent of the contract's estimated cost, excluding fee, for most work, and 15 percent for experimental, developmental, or research work. For architect-engineer services on public works or utilities, the price for designs, plans, and specifications is capped at 6 percent of the estimated construction cost, excluding fees. Private contracts have no such cap; the fee is negotiated.
How the fee works on a real job
Say a GC signs a GMP contract for a $4 million retail building with a 5 percent fee on the cost of the work (illustrative numbers). The cost of the work comes in at $3,700,000. The fee is $185,000, so the owner pays $3,885,000, under the GMP. If the contract has a shared savings clause, the remaining $115,000 might be split between owner and contractor. If costs had hit the ceiling, the GC would absorb anything over the GMP, fee included.
Change orders on a fee-based job usually carry the fee too. An approved $60,000 change at 5 percent adds $3,000 of fee. Whether the fee also applies to contingency use and to general conditions depends on the contract's definitions.
Small residential contractors use fees too. A remodeler working cost-plus might bill a homeowner for materials and subs at cost plus a percentage fee. The same discipline applies: write down what the fee covers, show the invoices behind the costs, and agree on how changes are handled before the first draw.
Common disputes
What is cost and what is fee. Office staff, estimating, accounting, and company vehicles are typically fee items, not reimbursable costs. The contract's list of reimbursable and non-reimbursable costs decides.
Fee on changes. Some owners argue the fee does not grow on owner changes. Read the clause.
Self-performed work. When the GC self-performs, owners may question markup inside the self-performed rates plus fee on top.
Audit findings. Cost-plus contracts usually give the owner audit rights. Costs disallowed in an audit also reduce a percentage fee.
It varies by project size, risk, market, and contract type, and there is no single standard for private work. On federal cost-plus-fixed-fee contracts, FAR 15.404-4 caps the fee at 10 percent of estimated cost for most work.
Is the fee the same as markup?+
They are related. Markup is a percentage added to cost in a priced bid. A fee is a separately stated amount for overhead and profit on a cost-based contract.
Does the fee include general conditions?+
Usually not. Site general conditions are typically reimbursable costs, while home office overhead is covered by the fee. The contract defines the split.
Can a fee be fixed even if costs go up?+
Yes. On a fixed-fee contract the fee stays the same unless the scope changes, which gives the contractor no reward for higher costs.
Maurice Francois writes and edits construction operations guides for Smart Business Automator. More from Maurice on the Scaling Legends podcast.
Related listening · Scaling Legends
The $10 Billion New York Bus Terminal: STV and Turner Just Won Program Management — How Every Contractor Can Position to Win Work on the Biggest Transit Project in North America Right Now
The Port Authority of New York and New Jersey selected an STV-Turner Construction joint venture to manage the program for the replacement of the world's busiest bus terminal — a project with a $10 billion budget. This episode explains what program management means versus general contractor, when trade packages will begin flowing, what PANYNJ prequalification requirements look like, and the specific steps contractors should take right now to get on the bid lists before prime packages are posted.
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Read the full episode transcript
Published transcript from Scaling Legends. It may contain transcription errors. View the source transcript.
Right now, I mean, right in the middle of Manhattan, there is this massive $10 billion tidal wave forming. Oh, absolutely. It's huge. And the crazy part is, if you're a midsize contractor, you don't actually need a New York zip code to ride it. We are diving into the total replacement of the Port Authority bus terminal at 8th Avenue and 42nd Street today. Yeah, and to really understand the gravity of this, you have to look at the daily volume. Right. The current facility, it handles over 8 ,000 buses and roughly 230 ,000 passengers. every single day. That's practically a small city moving through there. Exactly. And they are preparing to tear down this mid -century logistical behemoth while keeping it fully operational.
I mean, they're doing this right on top of some of the most complex subterranean infrastructure on the planet. Which is wild. And most contractors hear about a project of that scale, and they just assume the window is already closed, right? Oh, yeah. They think the ship has sailed. Right. They sit around waiting for a public request for qualifications to drop in some trade journal. But by the time those RFQs see the light of day, the smart money has already been maneuvering for months. What? Sometimes years. Exactly. So our mission for this deep dive today is to break down how you, the heavy hitters and firms looking to scale up, can position your business right now. to win a lucrative prime package before those public bids are even posted. And the window of opportunity is actually wide open right now because of a fundamental shift in how this specific
megaproject is being managed. How so? Well, a joint venture between STV and Turner Construction just won the program management contract from the Port Authority of New York and New Jersey. Okay, so for the seasoned business owners listening, the difference between a general contractor and a program manager is pretty much industry 101. Right. But the way STV and Turner are deploying this specific joint venture, it kind of changes the entire bidding landscape, doesn't it? It completely flips it. I mean, think of STV Turner as an air traffic control tower. They aren't flying the planes themselves. They are sequencing the airspace. They handle the design oversight, the procurement phasing, the overarching construction administration on behalf of the port authority. But they aren't the ones on the ground. Exactly. They're not the ones swinging the hammers, you
know, hanging the structural steel or pouring the concrete. Which means they aren't hoarding the prime work for their own internal divisions. Precisely. A traditional monolithic general contractor approach on a $10 billion project. it just centralizes far too much risk. Yeah, that's a massive liability. Right. So by stepping back into a program management role... STV Turner and the Port Authority are distributing that risk. They are actively carving this mammoth project into dozens of highly lucrative specialized prime packages that will be competitively bid out over the next few years. So instead of getting squeezed as some third tier sub under a mega GC, a midsize firm can actually bid as a prime on a package tailored to their exact
capability profile. Which is a game changer for midsize firms. It really is. So let's break down what those actual packages look like? I mean, what kind of scopes are we talking about here? Well, you kind of have to view the project chronologically to see the sheer volume of work. First, you have selective demolition and hazardous materials abatement right in the heart of Times Square. Oh, man. Yeah, that requires surgical precision. You have to prevent environmental hazards from affecting one of the most densely populated tourist hubs in the world. No room for error there. None. And then you hit deep foundations, where contractors will be digging into Manhattan bedrock while navigating active high -voltage subway tunnels just feet away. Wow. And you can't exactly just put up a closed for remodeling sign either. Yeah.
Where do those 8 ,000 buses go while you tear down the roof over their heads? Right. They have to go to temporary staging structures. And that brings us to one of the most complex scopes of the entire program. The staging itself is a project. The staging phase alone is a multi -million dollar prime package. You have to build temporary elevated ramps, dynamic routing systems, and passenger concourses just to facilitate the teardown of the existing terminal. Unbelievable. And then comes the transit scale vertical construction. We are talking massive structural steel packages and... MEP mechanical electrical plumbing systems that essentially power a small city. Let's put a pin in the timeline for a second because the duration of these individual scopes is what really stands out to me. According to Smart Business
Automator's market intelligence report. A single trade package on a program of this size can represent two to three years of core work. It's massive. Yeah. That completely anchors a mid -sized firm's pipeline for a decade. It creates total revenue stabilization. I mean, if you secure a structural or a staging package that covers your primary overhead for the next 36 months, your firm can scale its operations with incredible confidence. Because you aren't sweating the small stuff. Exactly. You aren't forced to chase 50 low -margin bids a year just to keep the lights on and the crews busy. Wait, OK, let me play devil's advocate here. Ten billion dollars in Times Square. I'm looking at this from the perspective of a subcontractor in Pennsylvania or Connecticut. Sure. It feels like the big five local New York legacy firms
are just going to swallow this whole. How does an out -of -town contractor even get a seat at that table? It's a fair question, but the Port Authority actually mandates a wider net. You have to remember, it is the Port Authority of New York and New Jersey, so their jurisdictional mandate is inherently regional. Oh, right. But even from a purely strategic standpoint, they require a massive pool of qualified bidders to ensure competitive pricing. Because if it's just the usual suspects... Bid prices skyrocket due to lack of competition. Exactly. They actively want national and regional firms bringing innovation to specialized scopes to drive those costs down. So they're practically begging... for out -of -state firms to bid if geography isn't the bouncer of the door keeping people out what is the actual
gatekeeper is the port authority's vendor management office and their pre -qualification process is well it's notoriously rigorous i can imagine because a default by a prime contractor on a critical package like uh deep foundations or temporary staging, that could delay the entire $10 billion program. So let's talk about the mechanics of that pre -qualification. What specific hurdles... does a contractor need to clear to get on that prime bid list? Well, first off, they scrutinize your experience modification rate, your EMR, relentlessly. It's not just a rubber stamp. Not at all. They aren't just checking a box to see if you employ a safety officer. They need to see a multi -year statistical track record of incident prevention. Right, because
an incident on a site with hundreds of thousands of pedestrians walking by isn't just your standard workers' comp claim. No, it shuts down the entire grid. And it triggers a national news cycle. And it directly compromises the owner -controlled insurance program, the OCIP RAP, that governs the liability on these mega projects. Makes sense. But beyond safety, you have to prove substantial financial runway. I mean, can your firm float the early stages of a massive mobilization? Buying specialized materials, making payroll. Exactly. Purchasing all that and paying labor for 60 to 90 days before that first requisition actually gets processed and paid. That's a huge cash flow test. Yeah. What about diversity goals? Because on a lot of private commercial jobs, MWBE participation is treated like a... You know, a good faith effort
box you check at the end of the month. On a Port Authority project, it is a strict contractual mandate. You need concrete, documented commitments to minority and women -owned business enterprise inclusion. So no coasting on that one. Absolutely not. You must prove your historical track record of actually hitting those percentages, tracking the downstream payments, and managing the compliance reporting down to the cent. Wow. If your administrative team can't handle complex certified payroll, and Tier 3 subcontractor compliance, you will not survive the pre -qualification audit. Okay, but say a firm has the pristine safety record, the bonding capacity, and the MWBE tracking down cold. But they've never actually worked directly for the Port Authority before. Right. How do they prove to the vendor management office that
they belong on a prime bid list for the world's bus terminal? You map your comparable transit experience. The reviewers understand that very few firms have built a Port Authority terminal. Because there's only one. Exactly. Exactly. But have you executed major phased work for the MTA, NJ Transit, Amtrak, the PATH system? Oh, I see. Or perhaps you've handled complex logistical phasing at a major airport terminal. So you're basically showing them you understand how to build in highly secure, highly trafficked, active environments where passenger logistics dictate the construction schedule. Precisely. You take that comparable experience and you hit the Port Authority's online vendor portal today. You begin building your prequalification file right now. Don't wait for the RFQ. Gather the reference
projects, the safety logs, the audited financials, and submit them before the competition intensifies and the vendor management office gets backlogged with hundreds of applications from reactive firms. Getting in early really is the entire game. And, you know, Smart Business Automator's market intelligence report actively tracks these mega project procurements and program management appointments specifically to give contractors advance notice to engage. Which is incredibly valuable intel. Yeah, because by the time the RFQ drops in the trade journals, your firm should already be pre -qualified and having technical conversations with the air traffic controllers at STV Turner. But, you know, securing that pre -qualification and winning the bid is thrilling, but executing a massive transit job without bleeding cash, that's a completely different
operational reality. Oh, for sure. Winning the job is the celebration, but executing it is the grind. Always is. Let's look at the upside first, though. The multiplier effect. Landing one trade package on this terminal builds a resume that opens doors to the entire regional megatransit pipeline. Oh, absolutely. You become a known, verified commodity. Right. If you perform under pressure on the 42nd Street bus terminal, you are suddenly a preferred entity for the Gateway Tunnel project. the Second Avenue subway extension, and the massive Penn Station reconstruction. You're proving you can play in the big leagues. You prove to the regional authorities that your internal operations can handle the scale. But you have to survive that scale first. I mean, winning a package like this is like stacking dominoes. If your internal back office operations
are wobbly, the sheer volume of paperwork is going to knock the whole chain over. It'll crush you. So how do growing contractors actually handle this level of complex administration without collapsing under the weight of thousands of RFIs and submittals? You really have to modernize your technological capabilities. You cannot manage a port authority package using messy whiteboards, It's a recipe for disaster. The administrative friction alone will destroy your profit margins. Let's talk mechanisms then. What does a bulletproof tech stack actually look like when you're coordinating with STV Turner on a project of this magnitude? It begins with smart document organization. On a $10 billion program, your team is dealing with thousands of pages of evolving plans, structural
permits, and MEP submittals. So you need a system that automatically tags and categorizes those files. Exactly. Because if a project manager is out on the active deck and needs to reference a specific structural steal, tolerance. They need to pull it up on a tablet instantly. They cannot spend 40 minutes calling the trailer to have an assistant dig through a physical filing cabinet. Time is the one non -renewable resource on a job site. I'd imagine keeping up with the daily logs and meeting minutes across dozens of subcontractors. is just as brutal. Oh, it's exhausting. Which is why top tier firms are utilizing AI generated daily logs and meeting summaries. Oh, wow. Think about it. When half your executive team is coordinating field logistics and the other half is sitting in procurement meetings
with the program manager, you cannot afford to have highly paid engineers wasting hours manually typing up recaps. No, you need them engineering. Right. The AI captures the audio, distills the action items, assigns the responsibilities, and distributes the documentation automatically to all stakeholders. You're completely removing the human fatigue element. And speaking of fatigue, reading through thousands of pages of dense specifications to find a single structural conflict sounds like a nightmare for any estimating or engineering team. It is, but the technology exists now to extract intelligence directly from those dense specks and drawings to catch missed items. So it's doing the cross -checking for you. Exactly. The system automatically cross -references the architectural drawings against the mechanical
specs and flags anomalies before you build them in the field. That's huge. It also allows your team to draft RFI responses using historical context. When a design engineer asks a technical question, the system pulls from your existing project documentation to formulate a highly accurate answer in seconds rather than days. In a transit environment, schedule is your lifeblood. I mean, if you miss a scheduled track outage window because an RFI took too long to answer, you might be waiting six months for the next available window. And that is where schedule risk detection becomes critical. Your back office systems must continuously review project activity, material delivery dates, and labor allocations to spot bottlenecks. Before they happen. Right. It flags that, say, a delayed structural steel delivery in week four is going
to cascade into a critical path staging delay in week 12. Giving you time to react. Allowing you to pivot operations before the delay even materializes. Let's talk about the money. Specifically, change orders. How does a firm prevent silent margin fade when STV Turner issues a complex change directive midstream? Well, you need real -time budget variance insights, and this is entirely dependent on API integration. Break that API integration down for me. Why is that specific connection the linchpin of profitability? Okay, so without API integration between your project management software in the field and your ERP, your central accounting software in the home office, you are relying on manual double data entry. is always risky very if a project manager gets an approved change order for additional
deep foundation work they update their local tracker but if they forget to manually enter that exact same data into the central accounting system your billing department is invoicing the port authority off a defunct outdated budget apis connect those systems directly The second a change order is approved on a tablet in the field, the budget updates universally across the entire company. You eliminate the administrative gap where human error usually costs contractors millions of dollars in unbilled work. Exactly. And Smart Business Automator's market intelligence report consistently points out that scaling up for these megaprojects requires reducing that exact type of manual coordination. Because it frees up your people. You have to allow your project managers to handle more financial volume
by managing the actual. physical build, not just managing data entry files. So the firms that actually walk away with the profit on these mega projects aren't necessarily the ones with the most heavy equipment or the biggest local footprint? Not at all. They are the ones with the tightest, most proactive administrative engines. The compliance work you do in the Port Authority Vendor Portal today, the APIs you integrate to protect your budgets this week, That is what dictates the capital you capture three years from now. You build the operational foundation before you bid the physical foundation. Well said. And here's something else to chew on as we wrap up this deep dive. Winning this specific bus terminal replacement isn't just about anchoring your pipeline for this decade. No, it goes much further than that. Right. Look at the environmental mandates
coming down the pipe. New York and the entire Northeast region are rapidly pushing toward fully electric transit infrastructure. It's the future. The contractor who figures out how to integrate massive charging arrays, heavy -duty electrical conduits, and green tech power grids into a bustling active terminal today, they are going to write their own ticket for every single green infrastructure mandate hitting the East Coast in the 2030s. This isn't just a bus terminal, it's the operational prototype for the next era of public works. The firm that masters this prototype leads the market tomorrow. Exactly. If you know a contractor who is looking to break into major infrastructure and transit work, send them this episode. It can be the edge they need to get on the bid list for a multi -million dollar package. Hit follow
on whatever app you're listening on so you don't miss tomorrow's Intel. And be sure to visit smartbusinessautomator .com.
