Read a construction bonus plan for five things before you sign: whether it is discretionary or formula, whether it pays on your projects or a company pool, how profit is defined, when it pays and whether you must be employed that day, and what it has paid people in your seat over the last three years.
A 20 percent target bonus with no written plan is a zero with good manners. It may well be paid. Plenty of contractors pay generous bonuses on a handshake, year after year, and mean every word. What you have been offered, though, is an intention, and the gap between an intention and a bonus plan is about four pages that either exist or do not. Ask to see them before you resign from anything.
What is the difference between a discretionary and a formula bonus plan?
A formula plan states how the bonus is calculated, so two people reading it reach the same number. A discretionary plan leaves the amount to management’s judgment each year. Most construction plans sit between the two: a formula that builds a pool, and discretion over how the pool is divided.
Neither kind is a trick. Discretion lets an owner reward the superintendent who rescued a job the formula would have punished. The trouble is slower than a trick and harder to see. A discretionary bonus rarely gets cut. It drifts: a little lighter the year backlog dipped, lighter again the year the firm bought a building, and nobody announces anything because there was never a number to revise. Three years on, you are paid a third less than the offer implied and cannot name the day it happened.
In the United States the law will not catch that drift for you. Federal wage law does not require an employer to pay a bonus at all, as the Department of Labor describes its scope, and what counts as earned under a written plan is mostly a question of state law and the plan’s own wording. State rules differ, so an employment lawyer in your state is the person to read a clause that worries you.
So start by asking which kind it is. Then ask what the formula is a formula of.
What is profit measured on in a construction bonus plan?
Usually gross profit on your projects or net profit for the company, and the definition decides the payout more than the percentage does. Check whether profit is measured before or after overhead allocation, whether it counts fade, and whether a job is scored at substantial completion or only at final closeout.
Three definitions deserve a slow read:
- Fade. A job bid at one margin and finished at a lower one has faded. Ask whether the bonus is measured against the original estimate, the budget after buyout or the final result, because each gives a different answer on the same job.
- Overhead allocation. A project can make money at the gross line and lose it after head-office cost is spread across it. If the allocation is set by someone else each year, part of your bonus is too.
- Closeout timing. Some plans score a job only when the last punch item is closed and retainage is released. On a job that takes a further year to close, that is a year of waiting, and a reason to ask what happens to open jobs if you leave.
| Clause | What it means | What to ask |
|---|---|---|
| ”At the company’s discretion” | No amount is owed until it is declared | What did this seat receive in each of the last three years? |
| ”Net project profit” | Profit after allocated overhead | Who sets the allocation, and can I see last year’s? |
| ”Measured at final completion” | Nothing is scored until closeout | How are jobs that span two years treated? |
| ”Company-wide pool” | Other divisions’ results affect yours | How is the pool divided among participants? |
| ”Must be employed on the payment date” | Leaving before the check forfeits it | When is that date, and are there exceptions? |
| ”Subject to change” | The plan can be rewritten mid-year | When was it last changed, and how? |
The CFMA is where the people who run these calculations compare notes, and their vocabulary is worth borrowing in the interview. A candidate who asks about fade and allocation gets a more careful answer than one who asks whether the bonus is “good”. Our note on incentive compensation describes how firms design these plans from the other side of the table. Read a sign-on bonus with the same care: its repayment terms often ask for the gross amount, and our note on the sign-on clawback shows why that can cost more than the bonus paid you.
One clause in that table costs more than the others combined.
When does a construction bonus plan pay, and do you have to be there?
Often months after the year it rewards, and usually only to people still on the payroll that day. A bonus for work done through December may pay in March or April, once the books close. Resign in February and many plans treat the whole year as forfeited.
Read that clause twice, because it works on you in both directions. It is the reason the offer in front of you may cost a bonus you have already earned at your current firm, a situation our note on leaving before the bonus works through. It is also a clause you are about to accept in the new plan, and it will be there the next time you want to move.
Project-based plans have their own version. Suppose a project executive in Tampa runs a multifamily job that reaches substantial completion in October, and the plan scores it at final closeout the following summer. Leave in the spring and the best job of your tenure pays someone else. Ask whether the plan pays out on completed projects after a departure, in what circumstances, and whether that is written down. When the money does arrive it will look smaller than expected for an unrelated reason: the IRS treats bonuses as supplemental wages, which have their own withholding rules. Your accountant can tell you what that means for your return.
None of this makes the clause unfair. Firms use it to keep people through closeout, which is a reasonable thing to want. It makes the clause a term with a dollar value, to be read before you sign and not in the week you resign.
Target against what was paid
The most useful number in any bonus conversation is one the offer letter never contains: what the plan paid. A worked example makes the point. A project executive is offered a base salary with a 20 percent target bonus. Asked what the seat received, the firm says 14 percent for 2023, 9 percent for 2024 and 5 percent for 2025. The target was 20 in every one of those years.
That history changes the offer more than any negotiation over the target would. A firm in Dallas offering a higher base and a 10 percent target it has paid in full for five years may be the better offer, and you cannot know without asking both. The firm that answers readily is telling you something good. The firm that says “it varies” and changes the subject has answered too. Price the offer on what was paid, then negotiate the base or a first-year guarantee to match, which is the approach set out in the guide to negotiating an offer. A seat with no history at all, such as the first project executive in a new office, has no payout record to ask for, so its bonus should rest on targets you control until the office has backlog.
Which of those six clauses is in the offer on your desk, and which have you only been told about? If you cannot tell, the candidates page is where to raise it with us. Selah Talent Partners is built around confidential executive search for mandates that cannot be publicly posted. Candidates never pay Selah anything.
A promise can be sincere and still not be a plan. Only one of them shows up in March.
Sources and further reading
- Department of Labor, Wage and Hour Division
- CFMA, Construction Financial Management Association
- Supplemental wages, IRS Publication 15, Employer’s Tax Guide