AvatarWalt:

Although I do almost all repairs instead of new work or remodeling, I rarely bid. I get customers to agree to a tentative budget and go from there. I like sharing the risk, because if I'm forced to bid to cap costs, I'm going to guess high. When the homeowner and I share the risk, I find I'm able to do the job I want to do instead of some hurry-up-git-'er-done-'cause-I'm-losin'-money job.

The last thing on earth you want is a contractor who is losing money working on your home.

Your initial take on these contracts is correct. The Cost of the Work Plus a Fee contractors can only bid their Fee and give you a budget/estimate for the work. What they would bid is the Fee.

The usual reason to use this method is when the drawings are not complete or you wish to start quickly. It avoids change orders and allowances. To work well the contractors must have greater project management skills.

There are ways to increase cost control. There can be a Guaranteed Maximum Price or even a Shared Savings.

Most people do not have the ability to specify a contract well enough to be able to do a lump sum with few allowances. Those that do specify in such detail are always shocked at the price differences between what they want, and the average low bid from a contractor who just stuffs a contract full of allowances and doesn't really bid the specifying document.

If you want custom, you'll pay the price either way. But you will have more control with cost plus. It's easier to get exactly what you want and make changes on the fly.

"The last thing on earth you want is a contractor who is losing money working on your home."

I don't disagree with this, but really, the last thing on earth that I want is ME losing money while a contractor is working on my home. Having just been on the paying end of a time-and-materials project with a very experienced contractor, I will emphatically say, "NEVER AGAIN." While mistakes can happen on any job, it really sucks when a major mistake happens and the customer has to pay not only for the time and materials for the contractor to make the mistake, but time and materials for tearing it out and correcting it. Small mistake? Not a big deal. Big mistake? BIG deal.

I agree: there's definitely more risk for you with a cost-plus contract, and you need to make extra sure that the contractor is honest and won't do juggling of the books and receipts coupled with kickbacks to drive the price higher than it should be. I'd go back to those two and ask them what information they lack that would enable them to bid fixed price. It doesn't sound like you're in the situation that renovator8 described. See what information holes you can fill in so they can bid more precisely.

If there are certain portions of the job that can't be known until the work starts (like what's behind a wall before you demo it), then perhaps you can carve those out to enable cost-plus while keeping work that's 100% know as fixed price.

Subcontractors can and do submit accurate bids for their work all day
long ... GC's could not bid jobs without accurate bids from their subs. So if
subcontractors "have the ability to specify a contract well enough to be
able to do a lump sum," GC's should be able to do the same. When mistakes
fall on them, contractors have more incentive to make sure they do things right
the first time.

If there are certain portions of the job that can't be known until the work starts (like what's behind a wall before you demo it), then perhaps you can carve those out to enable cost-plus while keeping work that's 100% know as fixed price.

This is always the way I've done it in the past, and the only way I will do it from here on out. The only reason I deviated from the usual this time is because I was dealing with a contractor that I have known for many years and I firmly believed he was trustworthy and fair. Lesson learned.

We did our last major remodel as a cost plus arrangement. Here's a couple of observations: 1) I don't think the contractor was as attentive to keeping the costs down as they might have been if he had been shouldering the financial risk more. Supply overages were carried off by the workers for their personal use later but did I really need boxes of nails, caulking, siding, specialty tools, etc.? No, but I paid for them. 2) My contractor had a deal with the materials supplier that I found out about afterward. He'd present me with an Invoice which I would pay but he would get a 10% rebate of that amount from his contractor's discount.

Our first major remodel was a bid job. Issues here were the contractor cutting corners. I had to confront them on the bracing in the attic for the roof expansion as it was inadequate. (I presented him with pictures I'd taken.) In his defense, he wasn't aware that this had been done as his crew told him everything was taken care of. And, they were going to put down wood flooring without an adequate sub-floor. (They were going to install 1/2" when the manufacturer recommended 3/4".) Similar discussion about using thin set vs. thick set for the tile flooring.

I'm not on the remodel forum much, usually over on kitchens, cooking, and appliances, but this subject title cough my eye, and I thought I would chime in. As a custom builder, (remodels, additions, and new construction) for over 35 years, upwards of 95% of my projects were done with a cost-plus contract.

Those saying there is more risk, likely have the wrong contract set up, and sound more like they are confusing cost-plus with some type of time and material basis.

In a nutshell, here's a typical scenario for the vast majority of my projects over the years:

After an initial meeting to discuss the project and what the contractual basis and subsequently my fee will be, the owner supplies me approved plans to distribute to subs for bid. I then compile all the proposals from my subs, which are fixed bids, spelling out exactly what their contract includes and excludes. I then share and review these bids openly with owner, and we discuss possibly alternate or multiple bids in some categories if the budget is not met on the first pass.

These fixed bid costs are passed on directly to the owner, and my client now knows the "cost" and my fee (which is usually a percentage, but not always) and has already been negotiated, therefore another known cost. Of course, especially with remodels, unknowns can arise, but those same unknowns would arise in a fixed bid contract, and likely, (ironically) any additional work be dealt with on a cost-plus basis.

Typically, I exclude plumbing and electrical fixtures, and appliances because most owners have not made final decisions on those items at the start of a project. This allows them to select, purchase and spend whatever they want for those items. I charge no fee on those items if the owner buys direct, which I prefer, although the install of those items is included in the subcontractors bids.

This is a very common arrangement for many custom builders in this area, and with many of us sharing the same subs, it's not uncommon for the owner to see some of those same subs proposals from another GC.

Some may term this arrangement as "project management", call it what you may, but I think it's the most risk free way to complete a project for both the owner and the contractor.

On the other hand, with a fixed bid contract, an owner has no idea what a GC might be paying a sub, and no idea how much that contractor's profit is...

"On the other hand, with a fixed bid contract, an owner has no idea what a GC might be paying a sub, and no idea how much that contractor's profit is..."

And on a fixed bid contract, it's none of the homeowner's business.

Well said cook.

This is how very large projects are managed. A big client like IBM would not consider any other approach. Often there is a Guaranteed Maximum Price but it is usually set pretty high and is there to comfort the owners upper management. the owner relies on the competition between the subs and the GC's management skills to control costs.

To chose a GC the owner will often meet with each contractor at the preliminary design stage and ask how they would damage the project and what their fee would be.

I've only been involved with one fixed price contract in the past 30 years and it was a nightmare.

You are correct, cookncarpenter, I did have cost/plus confused with time and materials. Your arrangement seems both fair and transparent. Without seeing the subs bids, one would have no idea if they were getting paid well enough to do a good job, or if the GC is using the cheapest labor he can find. Personally, I want to know those things, whether or not they are "none of my business."

I actually like Joseph's "none of the homeowner's business" statement. Helps make my point that the more transparency, the less risk to the homeowner.

If you want a fixed price contract, how the contractor arrives at the fixed price IS none of your business! Hopefully, your spec documents are accurate enough to compare several fixed bids realistically. How each of the contractors came to their bottom line isn't important. Maybe he uses family employees or has a hookup with the local shingle distributor. None of that is important. It's the sausage getting made in the kitchen, not what's getting served on the plate for $4.95. The important number is the bottom line.

If you want to know the price of every load of lumber and how much the high school guy hired to clean the site makes, then you don't want a fixed price contract. You want a cost plus contract. Not only is it an a la carte unlimited menu, but your plate of sausage and penne will include the price of the flour for the pasta, the price of the pork for the sausage, the cost of the cook, the waiter, the dishwasher and the cashier, as well as a % for spoiled and wasted food and broken plates and the pro rated cost of the meat grinder and range to cook it all on.

cookncarpenter: great post. Thanks for the explanation. I too was taking the "time and materials" view. However, even with the method you describe, isn't there still the risk that subs or material suppliers will do the "bump up the invoice/rebate" game? How do you handle making the homeowners comfortable that they won't be cheated like that?

jellytoast:

I'm curious that when you go to your dentist, do you ask how much his cleaning lady charges him? Do you inspect the office to see if it's clean enough or do you base your cleanliness evaluation on her pay rate? Do you shop the price of amalgam between dentists to make sure each isn't marking it up too much?

If the answer to any of these questions is no, my question to you is why the double standard between professional contractors and professional dentists?

The reason I posted was not to argue weather one method was better than another, but rather to quell the misconception that cost-plus is a bigger risk to an owner, or somehow becomes an open ticket. As I mentioned, a properly written cost-plus contract allows an owner more flexibility and control of their spending.

When I'm approached by a prospective client, it is because of a referral and my reputation, as I have never advertised. We all know a house is likely the biggest investment people make in a lifetime. Essentially a client is hiring me to act as an agent on their behalf to help protect that investment.

Where did I say anything about a contractor marking something up too much? Oh, and uh, heck yeah, I look around the dentist's office to make sure it's clean enough. What does that have to do with anything? If someone wants to go with a fixed price bid, I could care less. I have my own opinion on which I perfer and my own reasons for that. There's more than one way to skin a cat. How you came up with "double standard" from my post is beyond me.

Weedy acres, the way that is usually prevented is that the sub contracts are competitively bid as lump sum.

"Oh, and uh, heck yeah, I look around the dentist's office to make sure it's clean enough. What does that have to do with anything?"

jellytoast:

I'll let your quote answer your own question:

"Without seeing the subs bids, one would have no idea if they were getting paid well enough to do a good job,"

My question to you is why is there a difference between you seeing your dentist's sub contractor cleaning bill to see if they were getting paid well enough to do a good job and seeing your laborer's subcontractor cleaning bid to see if he's getting paid well enough to do a good job?

My point is, and I thank you for making it, is that people who would never dream of sticking their noses into the professional operations of their dentist or lawyer have no problem sticking their noses into the business of their general contractor.

My point is, and I thank you for making it, is that people who would never dream of sticking their noses into the professional operations of their dentist or lawyer have no problem sticking their noses into the business of their general contractor.

If you believe for a second that a significant attorney bill is not itemized and scrutinized, then you have never had one. Billable partner hours, associate hours, paralegal hours, professional fees, etc., are all broken out and itemized. Many clients ask for the time sheets and scrutinize them, and they do negotiate. I have seen many remittances with items marked out and a lesser amount paid.

Your dentist is an apples to oranges comparison. Dental charges are essentially price controlled. Dentists have very little control in the prices they are allowed to charge.

And there are just as many examples of professions with price scrutiny as there are without. You can't use examples of how anyone deals with one profession as the example of how they should deal with all.

The difference is that the dentist's cleaning expense is part of his overhead. On a Cost of the Work plus a Fee project all overhead expenses are included in the Fee instead of the reimbursable project expenses and are therefore not subject to owner review. A better example would be a reimbursable expense for a tooth cap from an outside provider. If you told the dentist you didn't like that provider he could use another one. It's a bad comparison because professional services are not similar to construction work. Working on your taxes or your body isn't like building your house where collaboration and quality control are more complex and necessary for a good result.

bry911:

I'm not talking about itemizing an invoice. Sure a contractor can put "IKEA Cabinets", "Delta Faucet", etc. on his bill.

When your lawyer bills you for a paralegal at $75.00 per hour, you may negotiate the rate, but you may not ask how much of the 75 goes to the paralegal. That is none of your business. You may not make sure the paralegal is being paid enough to do a good job.

"A better example would be a reimbursable expense for a tooth cap from an outside provider."

renovator8:

When I had my cap made, I did not ask my dentist if he got a volume discount for buying so many from his cap sub and for a cut of same. For some reason, potential customers have no compunction asking for a percentage of my supplier discounts. It was none of my business; it is none of theirs.

bry911, you are quite right; on a Cost Plus a Fee project the owner is credited with all discounts that accrue to the General Contractor (but not the subs) so Joseph Corlett is not using a Cost Plus a Fee delivery method but the standard small project method of an hourly rate plus marked-up materials. This method has nothing to do with what is being discussed on this thread and therefore his parallels are specious and irrelevant.

In a Cost plus a Fee contract type, an owner would not see a breakdown of a sub's competitive bid or invoice unless that was, for some reason, required by the contract (an owner can ask for almost anything in this kind of contract) and even then such breakdowns would normally be limited to special materials, fixtures and equipment not labor or overhead & profit. These costs might be reviewed by the owner if there was a change in the scope of the sub's work since that work would not be competitively bid. Such costs are often included as a proposed markup % in the sub's original bid.

The point of this kind of contract is to allow any savings derived from competitive bidding of sub contracts to accrue to the owner rather than to the contractor. The contractor is in turn well compensated for this service by a negotiated Fee.

Things get a bit more complicated when there is a Guaranteed Maximum Price. When the owner chooses a sub's bid that is higher than the lowest one, the GMP is increased by the difference. Also since the work of the GC's own forces is not bid, those labor rates are sometimes included in the contract. I have seen a Guaranteed Maximum Price split to provide a Maximum for those costs... we called it a Mini-Max.

These contract provisions can get complicated and are therefore not attractive to homeowners without professional presentation or home builders without trained staff. That's unfortunate because such contracts can be of great benefit to all parties.

renovator8:

Let me get this straight. You tell me ""A better example would be a reimbursable expense for a tooth cap from an outside provider."

When I utilize your suggested example to make my point, you then tell me "This method has nothing to do with what is being discussed on this thread and therefore his parallels are specious and irrelevant."

I would remind you that these threads have quite a bit of drift and that some drift is a good thing. I would also remind you that I did not bring up the subject "that on a fixed bid contract, an owner has no idea what a GC might be paying a sub, and no idea how much that contractor's profit is..." I make no apologies for responding logically and civilly.

I think I must have missed it, but can someone please explain the difference between cost-plus and time and materials? I built my house on a cost-plus basis. I was directly billed for the cost of the subs plus the negotiated fee for the GC, which is exactly how cookncarpenter explained it. However, most of the time I wasn't given a choice of subs; the explanation given was that "we know from experience that these are the best subs with the best prices". In addition to paying for the subs, though, I was also billed for the GC's employees (project manager, site supervisor, laborers for clean-up, etc.). I was billed at an hourly rate set by the GC, which was considerably higher than what the employees were paid. I can understand that this was to cover overhead, but then why was I charged the fee percentage ON TOP of the upcharge for the employees? And how is this any different than time and materials? I was charged for their time (the time portion), plus the cost of materials (miscellaneous supplies, dumpsters, tools that they bought supposedly for my project but then didn't give to me- and yes, I could have used any tools for myself, etc.), PLUS the fee on top of all of this.

In a Time and Materials contract, all labor is billed at a predetermined hourly rate that includes a markup for Overhead & Profit. The materials might also be marked up. It is used for small projects of undefined design that do not require multiple sub contractors working for a GC. A homeowner might use this contract for each of several trades.

The only contractor compensation in a Cost Plus a Fee contract is in the negotiated Fee. As I mentioned earlier, the billing for the GC's own forces can be a bit complicated and should be carefully negotiated by someone who knows this game. Staff hourly labor rates should include wages and benefits but not company OH & Profit. No home office staff costs should be included since that is in the Fee. As I mentioned earlier it is sometimes wise to set a Guaranteed Maximum Price for this part of the billing (a mini-max). The point of a Cost Plus a Fee contract is to separate the construction cost from overhead & profit and still allow competitive bidding for sub contracts.

Homebuilders are often reluctant to bid subcontracts and let the owner choose the winner because they are more comfortable with their favorite subs (at least I hope that is the reason). This pretty much eliminates the advantage of a Cost Plus a Fee contract to an Owner but would be heaven on earth for a contractor.

The cost of tools should be limited to rental tools and tools that were used up in the construction. Tools they keep for future use is overhead and is already paid for in the Fee. There is a gray area if the tool is so special the GC would normally not own one but in that case they should rent one. This would not apply to a sub.

This is all strictly controlled in a commercial/multi-family project but is often not controlled in homebuilding.