A cost-plus contract differs from a fixed price contract in that it takes the actual (not estimated) costs of the project and adds a fee for overhead and management. When not doing fixed price contracts, we utilize a bit of a hybrid- a cost plus fixed fee contract. In this scenario, we charge a fixed fee before we begin and then from that point on everything is billed at actual costs plus a percentage. There are a couple of reasons for this. It simplifies tracking everyone’s time (project managers, in-house labor, owners time, administrative time, etc..) as we don’t bill for these items separately in the cost-plus portion. It also incentivizes us to keep the project running in a timely manner and protects the client from us potentially “riding the clock”. This is a bit of an oversimplification, but more or less, we charge a fixed fee for management and our overhead and profit comes from the “plus” part of cost-plus.
The downside to a cost-plus contract is that nobody knows the exact final cost of construction until after everything is complete. We try to provide an accurate estimate, but it is still just an estimate, or educated guess. This is why I personally feel that cost plus is the fairest contract, for both the client and the builder. The builder is assured he is not going to lose money if the project is properly managed, and the client is paying based on actual costs, not high estimates or contingencies. The flip side of course is that there is risk sharing and the actual costs may be higher than anticipated. In our experience though, the estimates usually work out close in the end, with the final overall costs being just a few percentage points north or south of the estimate.
A cost-plus contract is usually advantageous when doing larger projects or projects where there are too many unknowns to accurately estimate. Cost plus contracts more easily allow clients to determine where they will appropriate funds and decide, for example, if they want a defect repaired or replaced. This type of contract helps to keep the builder and the client on the same team regarding costs. Sometimes it can be a gray area on how something is to be done or whether a defect is really a problem or not. It’s not uncommon that we’ll go to the client with defects we’ve noticed that fall in a gray area of whether cost of repair or replacement is worth it and let them decide. Likewise, we may present a couple of options of how to achieve a desired goal. “We can accomplish this by doing X, however a better, but more expensive way would be Y”. I view cost-plus contracts as us spending the client’s money and I want them to have as much reasonable input in how that is done as possible.
Trust is the key factor with any contract, especially cost-plus contracts. If you trust you have hired a competent builder that is working on your behalf and are comfortable not knowing the exact final price, a cost-plus contract is probably the best option. Afterall, your final cost will depend a lot upon the choices you make. From the builder’s side of things, we charge a smaller fee than with a fixed-price contract, because we are assuming less risk.
Either type of contract can be used successfully and by default we use cost-plus on anything over $300k. We will make exceptions, if asked, but to date that has never been requested. If you are considering a project and have any further questions about how our contract options work, please feel free to fill out the contact us page on the website or give us a call. We’d be happy to discuss how we can best work together.