Hello
I’m a newbie to the forum (though have subscribed to FH for years) so take it easy on me. Also, if this topic has been discussed previously forgive the repeat post, but could not find much in the archives.
I am beginning the intial planning for building a home and have a question about cost plus contracts. Our first custom home was built under the more traditional pre-construction contracted price. A while back I read an article in FH about alternative building contracts and was intrigued bythe contract that the author endorsed. I could be wrong but I think he was advocating Cost Plus. It seems very fair to me; the homeowner should pay exactly what the labor, materials and associated fees are for building the home, plus a fair fee for the GC’s services, set based on the scope and size of the project, with appropriate adjustments for changes in the project.
Questions;
- Does anyone remember this article and which issue it is in?
- Advice, opinions, experience from builders who have used this kind of contract?
Thanks in Advance
Replies
It can be a win-win situation as long as everything is spelled out in advance. Like do you pay markup on permits and utility deposits, what happens if special order material is returned cuz the HO changes their mind, etc.
"Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
a few words with lots of meaninga lot of things have to be understood by both parties
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
rule of thumb
cost plus risk on contractee
fixed price risk on contractor
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
Just ask yourself this question, "Who defines the costs?".
Does travel time get charged? Who pays for mistakes? Who pays what to clean up?
Under cost plus there is no incentive to use the lowest cost option. Do you really need Einstein to dig a ditch? Or pick up trash?
Just ask yourself this question, "Who defines the costs?".
Does travel time get charged? Who pays for mistakes? Who pays what to clean up?
All these questions would have to be defined in the contract. Typically any cost associated with the construction, including travel time, mistakes, and clean up would be paid as part of the contract. One compelling reason to use a Cost plus fixed fee contract is in a situation where much of the design is incomplete. We frequently find ourselves in this position and this type of contract has the necessary flexibility and fairness for both parties.
Under cost plus there is no incentive to use the lowest cost option. Do you really need Einstein to dig a ditch? Or pick up trash?
There may not be an incentive to use the lowest cost option but neither is there an incentive to use the highest cost option. The only incentive in using a high cost option would be to produce a higher quality building. Is this a bad thing? It is true that if the contractor can complete the project faster, he will make more money for the time he has invested in the project but again this is not always a bad thing.
There are two significant problems for the contractor with a cost plus fixed fee contract. The first is that if the project size creeps up and takes longer to complete, the fee may still stay the same. It can be negotiated upward but this is a potential area for conflict. The other problem can arise if your customer is of an accountant mentality. You can spend considerable time justifying each an every expenditure. The customer has every right to all this information but it can eat up considerable time especially if you are not a meticulous bookkeeper.
All forms of contracts have their strengths and weaknesses and each should be used when they are most advantageous for a particular case. And of course no contract is a substitution for two parties working together with a common purpose. A good contract merely reinforces that relationship.
This was great advice, thanks so much.
FHB #179 Summer 2006
Pg. 26
Thanks For the Reference!
As a GC I have used the Cost + Fixed fee for years . I prefer it over either Fixed fee or Cost + percentage.
Does take communication both before and during the project.
As other pointed out there are some areas that will crop up .
"Who fixes and pays for mistakes."
My take on that one is some mistakes are an inevitable part of the business, and are to be expected, obvious missing of major or butchered items do not fall under that heading .
Negotiation is an important part of this system.