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The Safe Contract: Fixed vs Cost-Plus

Posted to Helpful-Tips by Patrick in Encinitas, CA on 9/13/2007 12:19:52 AM

When building or remodeling a home, you will be confronted with various contracts from contractors.  Some will be presented in a professional form, while others will be hand-written or sealed with a handshake.  Regardless of the type of contract presented to you, it is important to verify the terms of the agreement.  You will find two types of terms presented to you: the cost-plus and the fixed contract.  But which one is best?

A cost-plus contract is a common inclusion in contractor agreements.  This term means the contractor agrees to supply labor and materials for “x” amount of dollars, plus any extras on top of that.  This type of agreement leaves the price open to circumstances encountered by the builder.  For example, an excavator may quote $9,000 to grade your building lot.  But say there is a large tree which requires extra digging to be removed.  He will charge you the base price of $9,000 plus the cost of removing the stump and roots.  The cost of removing the tree may be minimal, but coupled with any other surprises (such as rock, importing or exporting of dirt, etc) and the $9,000 bill can quickly double.  Contractors prefer this type of bidding because it relieves them of sticking to a set price.  Obviously, hauling away dirt, stumps, etc., is going to cost the contractor more money.  However, he passes this cost along to you – the homeowner.  This also means he does not have to be as accurate in his initial bid because any extras will be passed directly to you.

A cost-plus is the riskiest type of contract to sign.  You may be handed a bill twice of what you agreed to initially.  When working with a fixed budget, this can mean disaster.  If you sign this type of agreement, you have to hope that no unforeseen circumstances are encountered by the contractor.  However, in construction, surprises are a part of the business.  Construction would not be construction without surprises!

The more favorable contract is one with a fixed cost.  This means the contractor will supply all labor and materials for “x” amount of dollars.  If he missed something on the plans and it ends up costing more, he has to absorb the cost.  This puts responsibility on the contractor to be thorough in his bidding, because after all, he is in business to make money.  This type of agreement protects you from contractors looking to take advantage of homeowners.  They will not be able to charge you thousands of dollars more because “something was missed” on the home plans. 

Do not be surprised if you find a price variance between fixed and cost-plus contracts.  A cost-plus contract will typically be lower than a fixed cost bid.  The contractor wants to protect his profit, time and energy, so he will typically bid a fixed contract higher (to guard against mistakes).  Whereas with a cost-plus contract, he may be more apt to bid low, knowing he can charge more if unforeseen circumstances arise.  Homeowners often settle on the lowest bid as a way of saving money.  But in the long run, a cost-plus contract may cost you more than a fixed price.

In all fairness to contractors, they encounter homeowners who constantly change their mind.  This often results in increased labor and materials needed to complete the job.  It is not fair to have a contractor quote one thing, and completely change your mind and expect him to hold the same price.  Decide early what you want from the builder and have him quote a fixed price for the work.  This will save you time, headaches, and a lot of frustration during your project!

Construction Stress: How to Cope with It

Posted to Helpful-Tips by Patrick in Encinitas, CA on 9/13/2007 12:18:58 AM

Building or remodeling a home can be very stressful.  You will be confronted with questions and scenarios that are unfamiliar.  You may even find the process intimidating.  However, you can take certain steps to cope with the stress and uncertainty of construction.

The first step to handling construction is realizing there will be mistakes.  The sooner a homeowner realizes this, the better they will be able to handle unexpected events.  A contractor may order the wrong product and begin installing it.  Your home plans might list 9’ ceilings in the basement, but the foundation contractor poured them six inches too short.  These are just a few of the many things that can go wrong when constructing a home.  Some of these mistakes can be avoided by double and triple checking materials before they are ordered.  Try to be on site when major phases are started – like pouring the foundation – so that if an error occurs, you can rectify it on the spot.  While mistakes cannot be avoided, you can minimize their effects by being thorough in preparation.

A common stress when building is dealing with contractors.  If you are building a home, you may have 10-15 contractors working on your project over the course of construction.  Some will be great and need little guidance while others will be a constant thorn in your side!  So, how do you avoid stress when dealing with contractors?  Make sure you review their bids and fully understand what they are quoting.  You may assume the contractor is supplying the correct materials – but in fact, he may be quoting a “standard” product.  You might show up during construction only to find the plumbing fixtures he installed are hideous!  When you approach him, he will point back to his bid where he listed the make and model of all the plumbing fixtures.  If you signed the contract, you approved the materials and there is not much ground to stand on.  This can turn into a situation where you want them replaced and he offers to do it – for an additional fee.  This example shows how a simple oversight on the bid can lead to a larger problem.  Take the necessary time to review the bid and you can avoid a host of problems.

Another point of contention with contractors is paying them on time.  If you are working with a General Contractor (GC), he will have a group of subcontractors performing the work.  The GC will give you a bill prior to his payroll date.  If you do not pay the bill on time, not only will you upset the GC, but also his workers.  They may even walk off the job until you pay them!  Time is money in construction, so keeping the process moving will save you money.  Pay contractors on time and they will keep the work progressing.  If you do not pay them on time, you risk work stopping and in the worst case scenario, a mechanic’s lien on your property (never a good thing). 

As with any new experience, you will be unfamiliar with certain terms, processes and materials.  This is quite common and in the large picture, makes the project fun!  But if you do not understand something, investigate the matter.  Ask friends, relatives, and others for their insights.  The Internet can also be a great avenue for learning more about products and techniques.  Many decisions – which seem small in nature – can affect the finished product of your home.  For example, windows may seem simple, but can be quite complex.  You may ask your builder to supply the windows, only to find out once they are installed, they do not flow with the home’s architecture.  The type of window (slider, single hung, double hung, casement and awing) coupled with choices like grids and color, can offer endless possibilities.  But, with these possibilities comes ample opportunity for mistakes.  By visiting window showrooms, viewing the product on manufacturer websites, and looking at the windows on other homes, you can avoid these mishaps.  The answers to your questions are out there – you just need to take the time to investigate them. 

Building or remodeling a home is never easy, but the rewards can be beneficial (emotionally and financially).  If this is your first project, be prepared for unexpected events and questions about unfamiliar topics.  A wealth of knowledge is available through people who have gone through similar projects – ask them for pointers.  The Internet can be a valuable resource for learning more about products, mistakes, building techniques, etc.  If you use all the resources at your disposal, you can plow through speed bumps to a successful construction project!