Fixed Price vs. Cost Plus
Updated: Feb 16, 2020
We get a lot of questions about the difference and which one is best. Let's go over the differences and some pros and cons of each.
First things first: you have to trust your builder and your builder has to trust you... Even the best contract method will be insufficient if we can't trust each other. Doesn't mean the contract is not important, it is very important, but there is no one method that is bullet proof and fair for BOTH of us. Now, some things to think about...
Fixed price: We agree on the cost of the finished project in advance.
A few things:
(1) There should be few surprises, you know up-front how much your project will be, but...
(2) watch out for "allowances". Allowances are part of every project and bid. We give you a reasonable number for the appliances. flooring, plumbing fixtures, etc. But you make the final decision and if you select items over the allowance amount you still pay the difference. When looking at any bid, ours or someone else's, be sure the allowances are sufficient.
For instance, if we give you a bid for a home that is $300,000 and we say you have an allowance for appliances. flooring, plumbing fixtures, etc. at $35,000. That means you have that amount of money to spend on those items and if you do your home will cost $300,000. You can pick out what ever items you want. If they are more or less the difference will change the final cost of the home.
If another builder gives you a price of $290,000 for your home, GREAT! you just saved $10,000. But if they only allowed $15,000 for allowances and you picked the same appliances, etc. you would have picked out with us, the house would cost you $310,000! The "lower bid" would end up costing you more.
Under our contract you would have paid us $265,000 and then spent what every you decided on appliance. Under the other bid you would have paid your builder $285,000 and then spent what ever you wanted on allowances items.
(3) Change orders. Even if you have a fixed price contract, if you make changes you are responsible for these additional costs. The should be agreed to in advance and in writing. But they add up! Make sure you keep track (we will help) or there will be some nasty surprises at the end.
(4) Cost over runs. If materials go up you are protected. If they go down, we get the benefit. Who ever takes the risk gets the problems or benefits. In a fixed-cost contract the builder takes the risk. But read your contract carefully, there may be a clause that pushes some of the risk to you. A standard clause is one that if there is a wild increase in costs--say a hurricane hits and prices go through the roof--the builder has the right to re-negotiate.
Cost plus: We agree to our overhead and profit (either percentage or dollar amount) and the you pay the other costs. But lets go over this in another post...