Cost Plus or Contract Building?
When planning to build a new home and you’re choosing a licensed general contractor, the two main ways to proceed are by having a fixed contract with allowances for the products and labour or a cost plus contract where you are given the invoices to pay for the products and sub-trade work (cost) plus a management fee (often 10%-15%) of the value of each invoice. Ultimately whichever way you go you need to carefully select a reputable general contractor.
Often in the fixed contract model, clients and contractors get into trouble when allowances are not considered “high enough” or emotional decision making by the clients takes them well outside of their planned budget. It is the contractor’s job to start with the parameters of the contract agreed upon based on available budgets and help the client maintain this “budget road.” There should be some give and take if available in the budget for the extras to be paid for in addition to the allowances given. In this scenario the client is sometimes left concerned that he is paying more than he has to for his new home.
Opting for the cost plus contract scenario is often what is done to alleviate this concern but can be very misleading. Up front it looks good as you will see each invoice and you will know exactly what you are paying for everything. Sounds great, right? In control! This conversation often starts with, “How much does it cost to build a new home these days?” The response is usually, “Roughly (ballpark figure) somewhere between $165 per sq. ft. to $265 per sq. ft. We have a polished team of sub-trades in place that we have used for years.” At this point it is imperative that you know that your managing contractor has two or three sub- trades that can and do provide quotes for each major portion of the budget (plumbing, electrical, heating, etc) so that you are not just paying any team invoice but that you actually have a competitive situation going on. Otherwise buyer beware.
For some reason we all hear the lowest number and think that this will be our budget. 2000 sq. ft. home times $165/sq. ft equals $330,000. (Did we forget that 500 sq. ft. garage… they are free?) 2000 sq. ft. x $265 is $530,000 (still with the “free” garage?) We all have very modest taste until an emotional purchase on a beautiful kitchen that we just have to have or engineered hardwood floor that we just love so much puts a $50,000 hole in the budget. Is this possible? You bet it is, your selections are responsible for holding the line on the budget. In this situation with a fixed contract in place the contractor steps up and says, “Wait a minute here. Where is this money coming from?” Your first thought is, “we will cut out something else.” However, you probably will not as there is no other place to cut most of the time. If this is your second or third home and maybe even if it is your first, I can comfortably tell you that you are more likely to fall somewhat higher than the lowest possible side of this per sq. ft. range. Often in the cost plus contract scenario, the contractor is in a much safer place because if you are not disciplined and are simply paying invoices (and of course choosing “good, better, best”) you can find yourself well outside the budget that you thought you could stick to. After all, you are making the decisions to choose the “best” or at least “better” in most circumstances. “Good,” although adequate, is often not chosen. In a properly managed build the general contractor even in a cost plus contract scenario, however difficult, should at least attempt to reign you in and you need to ask for this type of management when selecting your general contractor.