We offer two different contract formats at Custom Dwellings depending upon job size and customer preference. Either one can be used successfully, and one is not better than the other. We typically do larger projects on a cost-plus basis, because the cost-plus version is typically a better value for the client and in our opinion the fairest contract for both the client and builder.
A fixed price contract works best when the plans, specifications, and all materials and finishes are determined before entering a contract. Allowances can be used for unselected items, but then you don’t truly have a fixed price. As a builder, the actual costs are the same whether using a fixed price or cost-plus contract. However, the price to the client will be higher for a fixed price contract due to the risk assumed by the builder. The fixed price contract will include a contingency price when determining the final contract price. We use a small percentage of the estimated costs as our contingency, but that small percentage can become a big dollar figure for larger projects. This is done because the builder assumes full responsibility for all risks associated with the costs of the project, including if labor and material rates go up (within reason). Prices are always in fluctuation and if they go up in a fixed price contract, the builder loses and if they go down, they benefit.
Another risk for the builder with a fixed price contract is what I’ve heard described as the “fright factor”. The “fright factor” is having a client who looks at everything through a magnifying glass and wants to demand perfection beyond reasonable expectations and industry standards. Any builder can walk into any home in America and pick it apart. There is no such thing as a perfect home without some sort of blemish. With a fixed price contract, the builder must price in the possibility of replacing items with even the slightest blemishes that a client may demand. In general, people with a fixed price contract are more inclined to expect minor imperfections to be replaced, because it doesn’t cost them anything extra. To be clear, we’re not referring to shoddy workmanship, which should without a doubt be repaired or replaced, but about the gray areas of requests that are not reasonable based on industry standards or items that can be successfully repaired instead of being replaced.
In a cost-plus scenario, people tend to be a bit more reasonable with their expectations, since they know they must pay for it. A good example to illustrate this point is sheetrock imperfections. We have a process that will catch probably 95% of imperfections. However, the client may then spend some more time in the home or in different lighting and see some more items and request more touch-up. This process can be never-ending as it is literally impossible to achieve 0% imperfections. If the client realizes they must pay for every touch up, because it isn’t fair to expect their builder to return time after time every time they spot the smallest problem, those small problems tend not to be a problem after all.
In our next blog post, we’ll have a discussion regarding cost-plus contracts, or as we do them here at Custom Dwellings, a hybrid of fixed fee and cost plus.