So, he's really charging you 19%. Which would be much closer to market rate than a ridiculously low 9% Even 19% is a bit low in a busy building economy.

We had a number for general conditions and the builder's percentage was in addition to that.

(edited: to clarify, our general conditions numbers were spelled out in the bid and consistent with the type of contract terms JDS set out below. For example, general conditions included our site supervisor, portable facilities, construction fencing, but not main office overhead.)

Just pay attention to the bottom line %, in your case 19%.

To be honest, I don't know why he's breaking it down, it only adds unneeded complexity. Kinda like going to a restaurant and seeing a meal for $30 or seeing one that has: "Table setting fee: $4, Tableware: $2, Steak: $10, Peas: $2, butter $1, Napkin:$1, Table clearing fee: $4, Dishwashing fee: $5, Check fee:$1. Must take all.".

Thank you for the feedback! Sounds like his cost plus proposal is typical and fair,

Now to decide whether to go with cost plus or fixed fee. I like the idea of fixed fee for simplicity. We have a few months to finalize the design and pick finishes, so we could really specify almost everything in the initial contract (vs. having allowances). I think a fixed fee contract may be doable and fair to both the contractor and me, just involves way more work upfront in pricing everything.

Your contractor needs to understand that "Cost Plus" is an abbreviation for a type of contract named "Cost of the Work Plus a Fee" and that Cost refers to money spent directly for the cost of construction rather than money spent indirectly for the cost of operating the contractor's business. Therefore, in a "Cost of the Work Plus a Fee" contract, all of the contractor's normal off-site Overhead and Profit would be included in the Fee.

A typical contract would define Cost of the Work as follows:

"5.1 The term “Cost of the Work” shall mean costs necessarily incurred by the Contractor in the proper performance of the Work."

"6.1 The Cost of Work shall not include:

6.1.1 Salaries and other compensation of the Contractor’s personnel stationed at the Contractor’s principal office or offices other than the site office, with the exception of any Project Managers and/or any Project Superintendents assigned to the Project.

6.1.2 Expenses of the Contractor’s principal office and offices other than the site office.

6.1.3 Overhead and general expenses, except as may be expressly included in Article 5."

The only reason I can think of for the contractor to include Overhead in the Cost of the Work is that it allows a 10% Fee to be added to the Overhead which simply increases the billing to the Owner by 0.9%. That makes no sense.

Since this arrangement complicates the accounting for no apparent benefit it would be better to just set the Fee at 19.9% of the Cost of the Work. Frankly, I would negotiate a lower Fee if you are in a rural area.

Your reference to "10% of what he estimates the job to cost" is confusing. Such an estimate is often called a Budget and unless there is a Guaranteed Maximum Price, it is not used for billing. Billing would be for the Cost of the Work plus the actual cost of construction as shown in the receipts and time records submitted to you with the bill.

I should add that a "Fixed Fee" is a lump sum fee added to the Cost of the Work and billed in installments determined in advance or based on the % of completion of the work. What the contractor is proposing is a "Percent Fee" based on a % of the Cost of the Work therefore it varies with the cost of the work.

I think you may also be using "Fixed Fee" to mean a "Fixed Price" (often called Lump or Stipulated Sum) contract where no fees would be involved.

A Cost of the Work contract requires more project management by the owner. Be sure you know enough about your role before you commit to such a contract. A Fixed Price contract requires more and better documentation before the contract is signed. Unless you are experienced you may need someone to represent you for either contract.

Unless you are more concerned with quality than cost I would not recommend a Cost of the Work contract without a Guaranteed Maximum Price and that adds additional project management tasks to your role.

Our prior build was a "Cost Plus" contract exactly as JDS describes - actual cost of the work, plus an agreed-upon percent fee that included all of the contractor's overhead and profit.

JDS - thank you! I appreciate your walking me through that.

I need to be more precise with my wording. To clarify, the builder proposes a Cost of the Work contract with a "fixed fee." The fee is a dollar amount I know already and is equal to 10% of my current budget. His fixed fee will stay the same if I go over or under budget, but his admin charge will vary with my budget and is equal to 9% of costs. Maybe his bifurcated approach is to protect him a little if I go crazy with my budget? If I were to decide to build a house that's 2x what we've budgeted (which we could do if we wanted to max out our loan potential) then he'd be getting a bad deal if his fee were completely independent of our budget.

I'm really liking the idea of a Fixed Price (Lump or Stipulated Sum) contract better. I just don't want the project management. My main concern with that type of contract is that my builder has an incentive to use the cheapest price/quality everything, so that's why if we go this route I will want to specify all materials and finishes.

Specifying proper materials is much easier than specifying proper labor.

He's just splitting his Fee into a % of actual cost for overhead and a fixed sum for profit. How he arrived at the Fixed Fee becomes irrelevant as soon as it is established.

When you said the overhead % fee was "in the costs" you meant it would be added to the costs in the bill.

I think you understand all of that now. I agree that a Cost of the Work contract can be difficult for a homeowner to administrate. The success of the Fixed Price/Lump Sum option depends a great deal on the quality of the documents and the subs he intends to use.

Choosing the contract type is a conundrum. IMO the best contract is a Cost of the Work with a Guaranteed Maximum Price and Shared Savings. It corrects for the deficiencies of standard the contracts. However it requires someone, like an architect, to manage your side of it which would add to your cost. I use it whenever I can but I act as the architect from the beginning to the end. The savings can be greater than my fee but sometimes not; you can't know in advance. And then some contractors are not comfortable using a contract they haven't used before. Conversely, some have gone on to use it exclusively on all of their projects.

Who designed and documented the project?

Springtime Builders - thanks for the comment, but I'm not sure I follow. Is your point that if we use a Fixed Price contract and specify all the materials/finishes, the builder will still have an incentive to build with cheapest labor cost possible and that'll affect quality? If so, do you have any suggestions for making sure quality isn't compromised?

My plan, regardless of which type of contract we use, is to (i) use a builder that is a known quantity to me (he's working on a commercial project for us now), so there's a level of trust and we have experience working together, (ii) hire our architects to do periodic inspections (they won't manage the project overall but our willing to come here as needed) and (iii) maybe even have a few people we know who do or have done construction (but not on our job) do a couple of informal inspections for us. We know that they'll be better at spotting errors/issues than we will be.

JDS - "IMO the best contract is a Cost of the Work with a Guaranteed Maximum Price and Shared Savings." I like this, too, and discussed that with our builder. He said he's experienced it before but only on much bigger jobs. Our home is going to be in the $400-$500k range, so would you recommend that type of contract for this size? For reference, we're building in a county where most homes are under $100k (people here invest more in land, barns and cows than houses, which is great except for when you're me and you'd like to buy an existing home...that's what led to us building).

Our project is being designed by architects from a city 2 hrs away. They do more modern commercial projects but were willing to help us. I'm documenting the project (I'm an attorney; not much experience with residential construction, but 10 years' experience with other types of real estate).

Thanks again for your help!

I would only use it if the architect would help you with it for a reasonable fee and can visit the site regularly.

I can see how it would be possible to overbuild for the area. I see that in Maine where expensive houses are sometimes sold for a bargain if they aren't near the coast or a tourist town. I wouldn't be afraid of a Lump Sum contract if the drawings are good and complete and the subs and suppliers are identified upfront and you have confidence in them.

Because of distance, I don't think we'll be able to get the architects here regularly. The fees for their travel time alone would make it impractical. So, at this point I'm aiming for Lump Sum, but willing to live with Cost of the Work with Fee if I have to.

JDS - you totally get our situation with respect to overbuilding. One builder I met with told me right away--and I know he's right--that we'll never be able to resell for what it will cost to build. We're going into this knowing that from an investment perspective, it's horrible. But to get the home we want on land we've grown to love, this is what we have to do.

Thanks for the thread and insight mo. Sounds like you are on the right path to me and think the selection of someone you trust is more important than the paperwork, especially if you value quality as much as upfront costs. Your relationship with the contractor and opportunity for future mutual projects makes your position stronger. Fixed-price works great with the right project and players but often leads to adversarial relationships. Labor is more important than materials so if using fixed price, use detailed plans and specs with few changes, extra construction management and use a builder you trust will do quality work.

I suggest getting an EnergyStar certification, the best value on the market for 3rd party verification of energy efficiency and healthy indoor air quality. Use their input at the design stage if possible. This is an easy way of building your home closer to the better international code levels of energy and ventilation.

So many points of view and perspectives! It's not exactly clear to me what your most important priorities may be in this project. That said, a cost of the work with a guaranteed maximum price and a shared savings--say 50% to the builder of any saving below the max price--is a good option, assuming it's agreeable to all parties. Building contracts, at the end of the day, are really about sharing the risks, i.e., who shares in the risks and how much? The cost of the work with a max cost and a shared savings is about the most equal-equal sharing of the risks in a residential project in my experience. Any other type of contract means greater risk and greater cost to one of the two parties.

Virgil Carter Fine Art - thanks for weighing in. You weighed in on my floor plan a few months back when I posted it as well. I appreciate the continuing help!