Katie:

Cost plus is becoming even more sensible now that price escallations are so common. You're sharing risk, but you don't want anyone who is losing money working on your job.

As the term implies, "cost-plus" agreements are for the actual costs of construction materials and labor plus a fee paid to the builder. The fee can be a fixed sum or a percentage of the total cost incurred. In my market, a cost-plus 20% agreement would be on the high end for construction of a custom home and on the low end for a remodeling/renovation project, depending on the project scope.

Our builder had a contract that clearly outline what was and wasn’t included and who was responsible for what.

Don't be reluctant to ask questions. When someone says something you don't understand, ask them to explain until you do understand.

PPF.

Good advice. I did ask "plus what?" since the percentage amount was left out of the initial conversation. I wanted to do a little research before asking more questions. This was the initial meeting so I will make sure to ask more questions before anything is signed.

Don’t just ask questions before signing have the contract vetted so you are covered

I understand the basic concept of cost-plus.

The questions I have are-

1. Is 20% reasonable?

It will be a fairly extensive renovation - 1. converting one bathroom into two,

2. reconfiguring the primary bathroom and closet area, and 3. renovating the kitchen, which may include moving stairs (depending on cost).

2. Are appliances usually included? (He doesn't include refrigerator, but all others.)

3. Are materials that the homeowner sources usually included (I am thinking mainly smaller materials - light fixtures, cabinet pulls, etc)?

Just wanted to get an idea of what was typical.

Thanks for all the help so far!

1. It’s less than we were charged for our new build but I suspect is regional.
2. You will need others involved too. Structural engineer, architect?
3. Our appliances were on us to buy and no mark up on them. We also paid for install as a separate thing
4. We were not marked up on anything we bought but the builder gave us a warranty and we had a new home insurance policy so most things they needed to purchase and install so it was covered

Just our experience.

True cost-plus is a percentage for the builder on top of cost to build. Nothing is "included". You spend as much or as little as you want. The builder can ballpark an estimate, but it is essentially meaningless.

There are variants of cost-plus you can explore.

I have seen cost-plus arrangements where you get charged a supervisory fee - like bilable hours. In my mind, appliances would definitely be part of the percentage charge - as would permitting, engineerings, architectural plans. Literally everything.

But it varies. The devil can be in the details.

First, cost has a very specific legal definition in contracts. It is the amount of money paid by the contractor after all discounts and rebates. So, by definition, a contractor must pass along his discounts on materials and can't charge a mark-up other than his builder's percentage.

If you purchase materials instead of the builder he will typically add his percentage to what you paid for that purchase. However, contractors often choose not to add their percentage to appliances because... the contractor assumes responsibility for proper installation and proper working order for anything there is a builder's percentage on. In other words if your range isn't working properly he has to solve that problem. He can still go through the appliance company to do that but because that is more trouble than it is worth major appliances are often excluded.

Typically, the builder's percentage will not get added to employees of the contractor. Cost is only for amounts paid to an outside vendor. However, a contractor has some leeway to modify various terms in the contract.

We have a cost-plus contract with our builder for our custom home build. He charges 20% on top of anything he is billed, whether for materials or labor. If we purchase something ourselves, that's on us, unless he installs it, in which case, we would pay the 20% on the labor cost only. We did this in only a couple of cases, our range hood and our backsplash tile, as we found better deals on exactly what we wanted than he did. We think 20% is a little high, especially as costs have escalated during our building timeframe (he makes more as inflation increases for the same material), but based on some of the responses you received below, sounds like that is a very fair rate for a reno. And to our builder's credit, he is on site every workday so truly does supervise the subs and make sure things get done right. And he even takes on some of the little jobs himself!

Plus is EVERYTHING. Labor and materials. Grown people babysitting and fighting with the LTL’s and a never ending cascade of scheduling and rescheduling.

Have ALL of your products on hand before you do demo.

Cost-plus is the only contract type our current builder uses at this point because costs are so unpredictable. Some of the nuances to have a clear understanding of related to cost-plus is associated with construction or builder contingency. Some builder’s consider the contingency as something in their ”column” to cover rework, errors, subcontractor interface problems, etc. You’ll need clear language in your contract that spells out what contingency means and clearly articulates these sort of nuances. It would be very beneficial to have a construction (not real-estate) attorney review your contract.

The standard AIA contracts are very good, balanced and cover a lot of areas normally absent from most cost-plus contracts.

AIA contracts