Cost Plus contracts

Some of the reasons for and problems with...

If you are building a project you may be concerned with the profit and overhead the contractor is making on your job. Is it "too high"? You also may feel you can get a better "deal" on materials or have a friend or relative who can provide work "cheaper" than we can. How do you know we are not marking up the material for "extra" profit? And, yes, I put some of those words in quotes because they can be a problem. So there can be a temptation to try to limit the overhead and profit contractually, to pay all the bills yourself to make sure you are getting the actual price the builder is getting.

The reality is that it all starts with trust. Does your builder have a good reputation? Then realize that there is overhead that must be covered and a profit we must make to stay in business... and provide for our families! At the end of the day, we will make what we need to make on a project or we wont be able to build it. But if we are to high on overhead and profit we will not be competitive.

Then let's take a look at who accepts the risk of problems during--and after-construction. During construction, if we are working with a cost plus contract you assume much of the risks of problems with pricing. Under a fixed-cost contract, we say we can build a project for a set price, if the trusses need to be reworked because we missed something it's our problem and our expense. If delays cause increase in labor costs? Again, our responsibility. If you pick suppliers or sub-contractors because you get a deal, who is responsible if something goes wrong with the materials or workmanship? What if there are delays with your supplier or sub? Everyone could be pointing fingers at everyone else. If we are responsible for picking suppliers and trades men and women then we have to fix it all regardless of who's fault it is. During or after the project within our warranty terms.

One place where cost-plus contracts can work well is in very unusual projects. We are working on a project built out of shipping containers. Not exactly a common type of home! If we do a fixed-price contract, we--and all our subs--will need to add for the unknown. We will need to protect ourselves for all the things that we don't know about that could go wrong. We will accept the risks because we are insuring against them with a higher price. If we do a cost-plus contract--with some ranges of pricing so the owners knows the high end--if the project goes smoothly the owner will realize some savings. If the owner trusts us to give her the accurate cost information (we will).

Going back to the beginning, if you do not trust your contractor, or think all contractors are making an exorbitant profit and there not going to make it on you, the best thing to do is get bids and pick the builder who you think gives you the best value for the price. Then get a fixed price contract, with change orders (above a minimal dollar amount) required in writing, That is the best way to protect yourself.