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Key Differences Between Cost Plus and Fixed Bid Contracts- Pt. 1 of 2

February 17, 2012

Those in the legal know will tell you, there can be as many different kinds of contracts as there are agreements between people, but in the construction world you will find that they fall into two basic types:
1. Fixed Price
2. Cost Plus

I can only give a much abbreviated explanation in this post. I hope that comments will generate more information on this topic. It’s crucial to understand the strengths and weaknesses of these two choices. In today’s post, I’m going to tackle the most common, a Fixed Price contract.

This is the contract style that most people think that they understand. It seems pretty straight forward. Two or more General Contractors are given home plans designed by an Architect, Residential Designer (RD) or even the Homeowner themselves. The General (many times a buddy of the Architect) comes back with a flat price and states that the total cost of the job will not exceed $X. Seems pretty simple. Most Homeowners feel that they are clear with the plans and/or scope of work so they can feel comfortable selecting the Contractor who comes in with the lowest bid. If indeed the plans are extremely detailed and there are very few or no changes to the scope of work, this can be a good option for those folks that do not want to be watching their sausage made. They might want to spend their time out to lunch rather than see the construction of their home progress.

The 3 biggest negatives to this type of contract are:
1. In over 20 years of reviewing plans, I’ve never seen plans that are detailed enough to prevent changes in the design or scope of work during the project. Few, if any Homeowners we’ve worked with understand the plans well enough to “see” their 3-D home on the 2-D surface. Many Homeowners have not designed the finished materials and colors, tile design, lighting, finished trim details, etc. Only the most costly Architectural-Design firms or Designers hired at a price, will work through these time consuming choices. The General can then include finished materials and/or designs in the bid that may not be up to the homeowner’s standards or taste. Let the good times roll! ( for the General, not the Homeowner) This is where a savvy General is going to make money on your project. When Homeowners find that the budget for the materials that they had in mind exceed the amount allowed for in the contract, there will be additional charges to allow for the change.

Many home builders, especially production or semi-custom home builders, will not eliminate the charge for the original item. For example: 4” white tile kitchen counter in the budget. Ick!! To change to a solid surface top, add the retail cost of the new counter plus the “change order” fee on top of the original contract price. Ka- Ching!

2. Homeowners will find that the most meticulously thought out plans by the most expensive architectural firms will have differences between what the paper says and what real life 3-D materials dictate, OR, what the most efficient use of those materials or that space dictates. Finger pointing to protect one’s home turf will start between Architects, Contractors and Homeowners. Whose fault is it that this catastrophe was able to occur??!!

A true story: Contractor designed the home. There wasn’t enough room behind the master vanity for #2 spouse to walk by if #1 spouse was using the sink. That change to move a wall that hadn’t been framed up yet cost the couple over $5,000.

The team effort needed to complete the project in a most successful way will be put under a tremendous amount of stress when these situations occur.

3. When putting the plans out to bid, a Homeowner is asking a Contractor to squeeze his profits down to the bone in order to compete. In today’s tough economic times, Homeowners with cash think that they’re in the cat bird seat in this regard. Who was it who said that you can’t beat a man at his own game? There are countless ways that a Contractor can squeeze costs out of the initial bid, none of which are going to be in the best interest of the Homeowner whose goal is to the get the most value for their money. Substandard labor and materials are only the two most obvious ways value can be decreased. There are plenty more secret cards a Contractor holds if they feel that their lively hoods are at stake.

Do you have a good experience with a Fixed Price contract you would like to share? Please do.

Please send me your questions or comments. Sharing your question or problem will certainly help others. You are not alone in your concerns!

If I can’t help with your specific problem or issue, I will work to refer you to a resource that can.

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