Custom Home Build Contracts – Cost-plus VS Fixed Fee

You have decided to build a new custom home or renovate your existing one. Now you are trying to work out what the best type of construction process and contract is to choose.

Custom Home Build Contract Choices

custom home designThe two main choices are cost-plus and fixed fee.

Cost-plus means that all the labor, materials, and management cost are added up and multiplied by a percentage to get the total amount due.

On a fixed fee contract, all the details of the project are documented and a fixed price is given to do the exact work described in the contract.

There is no simple answer as to which is better for the home owner, but not knowing certain information about both processes can make your job a disaster no matter which method you choose.

I will give you some of the benefits and liabilities of both types of contracts, and some tips on making them work in your favor.

Cost-plus Custom Home Build Contracts

Benefits

  • You pay only what the actual cost are and the agreed upon markup
  • It is easier to make changes to the scope of work as you go
  • The exact scope of work does not need to be worked out in detail before the project is started
  • The contractor does not get paid for any contingency money he may put into a fixed price project
  • It is a completely open process and you get to see where every penny goes
  • It can sometimes be the only option for “fast tracked projects” ( projects where the construction starts before the design is complete)

Liabilities

  • There is no upside limit to the budget and the costs could spiral out of control
  • Cost plus arrangements make it easy to be lazy and not think the project through thoroughly in the design phase, which will cause more costly change orders and lengthens the time the project will take
  • Unless you take some steps to manage the pre-construction process you will not really have any idea what the end cost or quality will be

Ways to Make Cost-plus Work for a Custom Home Build

  1. Do a thorough pre-construction design process first so that you and your contractor know exactly what is going to be built. This would include all architectural design, construction drawings, interior design and specifications. This will save the time and cost associated with changes and slowdowns during the job
  2. Have your contractor get fixed prices on all the sub trades and materials during the design process. This way you will be nailing down a large portion of the cost before you sign the contract
  3. Don’t focus on what the markup is when you compare one company to another. Focus on what the end price will be.

custom home construction contractThe way to do that is to know what the costs will be by having a proper design process done and by getting fixed prices on the materials and subs as mentioned above. You do the math on this and tell me what is going to cost you more: a cost of $500,000 plus a 15% mark-up or a cost of $450,000 and a mark-up of 20%.

By determining the full design details and scope of work beforehand, getting accurate pricing, and a detailed spreadsheet of the all the project costs before you get into the construction phase, is the only way to protect yourself against cost overruns on cost plus contracts.

Fixed Price Contracts for a Custom Home Build

Benefits

  • The obvious benefit is that the price is fixed. If the contractor goes over his estimated budget you do not pay more
  • You don’t need to be watching over the costing on the project because the price will not change unless you change the scope

Liabilities

  • If the contractor comes under his estimated budget he keeps the savings
  • You do not get a breakdown of all the costs that go into the project
  • If you decide to make changes to the scope during the project a ‘Change Order’ will need to be negotiated. This is not really a problem unless there are a lot of changes

Ways to Make Fixed Price Contracts Work for Your Custom Home

Actually, the best way to make fixed price work is the same as the way to make cost-plus work. Do a thorough pre-construction design process. When you are getting a fixed price on a project you have to get every detail of the design worked out or one of two things will happen

  1. the price will change when you do finally make all the design choices

or

  1. you will get what the contractor had in his budget which may not be what you want

Make sure you get a very detailed contract that describes all the work to be done on your custom home, complete with all the specification and quantities of all the fixtures and finishes.

To sum it up the best way to avoid costly delays, surprises, cost overruns , and disagreements is to spend the time to do the pre-construction process thoroughly, with full drawings, complete specifications, documentation and pricing.

I hope this helps.

Nisha MacNeil is the lead custom home designer at Kerr Construction, award winning renovation company and custom home builder in Vancouver.

Creative Commons Attribution: Permission is granted to repost this article in its entirety with credit to Kerr Construction.

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