Cost Plus with No Gross Max Price (GMP) is commonly referred to as simply “Cost Plus.” This contact method has no fixed price. Essentially, the Builder is saying: “I’ll build your house, give you every option you want, and you (the Owner) agree to pay for the material and labor cost PLUS a fee. The fee embodies the Contractor’s profit and overhead. The contract should specify what project costs are to be charged, and what is not. For instance, if your house is wood-framed, you would expect to pay for the labor and framing material to build the walls. These are direct costs and easy to understand. But you may not be expecting to see and pay for indirect costs such as the builder’s supervision to manage the framer and coordinate with other trades.
Shared savings is a necessary part of the cost-plus agreement. Most Contractors, will understand their fiduciary responsibility to the Owner and will act responsibly with spending the Owner’s money. But to ensure the process is properly incentivized, the Owner and Contractor typically agree to share the savings on the project. Essentially, they agree on an initial budget, and if the project ends up being less than the budget, then the savings are shared. Typically, the savings split is in the realm of 60%-40% to 75%-25% with the larger portion going to the Owner. For this to work, the initial budget needs to be established based on proposals and substantiated cost estimates. The “savings” then comes from the diligence on the Contractor to keep costs down and to employ cost-effective building strategies. Typically, the savings do not apply to contingency and allowances. If the Owner selects an inexpensive faucet, all of that savings belongs to the Owner. (Although, the Owner may decide to apply those savings from the kitchen faucet to increase the allowance for another item they may wish to upgrade). But, if the contract price is increased for added scope via a change order, then that added amount should be used when calculating the shared savings.
Last time, we reviewed some important elements of any construction contract. Don’t forget that a detailed Scope of Work is essential to setting the proper expectations with your contractor.
Now let’s go through the types of contracts that you may use. Contracts can be lumped into several different types: 1- Lump Sum, (or Fixed Price), 2- Cost Plus (with or without a Gross Max Price, or GMP), and then there are hybrids such as a design-build or design-assist that starts as a Cost Plus and then converts to a Fixed Price. So let’s start with the one most used and easiest to understand:
As a customer, you may want to know how much something costs the builder. With a Fixed Price contract, generally, the Owner doesn’t have the contractual right to this information, and thus, the contractor will generally not share that info. Sometimes, owners want to know the cost of items, so after a quick “Google search”, they think they have the answer. This is not necessarily the case.
Cost per square foot pricing is a terrible way to compare houses since it doesn’t consider any of the unique features and finishes of your home. As a simplified example, let’s say that a 1,000 square foot (SF) home costs $150,000. That makes it $150/SF. But what’s included in that? We don’t have enough information to know. There are so many variables that affect the cost of a home. For instance, does the home have any carpet, or is it tile? There is a large price difference between these two.
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When you are sitting down with your contractor to finalize the home you are building, they will most likely bring a contract for you to sign. Many folks will sign the contract without really understanding it. This is a BIG deal as you need to know what you are legally obligating yourself to. What some people don’t understand is that if a lawful contract is signed in good faith, they are bound to it and the contractor has the right to sue you if you break, or breach, the agreement. (Likewise, you can sue the contractor if he breaches).
This question gets asked a great deal and the answer is driven by the market and current material prices. Generally speaking, building up tends to be less expensive than a basement. That said, not too long ago, lumber was at an all-time high and basements were the better option. Check with your builder and they can advise you on the pros, cons, and cost of each.
There is a long-standing expectation in this industry that all contractors should give free estimates. As a result, little work actually goes into the initial estimate. Herein lies the problem. Some contractors guess an estimate or make a low bid to get their foot in the door. As a result, the consumer chooses the low estimate because he or she trusts that the contractor actually put a lot of time and energy into quoting their project. But is the estimate really free? Seriously, who works for free? I don’t know too many people who are willing to produce quality products for no cost. The fact is that people don’t work for free, especially business owners. If they do, they typically aren’t in business for long. Someone will eventually pay for that free estimate in one way or another. Whether it is the one out of ten homeowners that accept an estimate and start a project or the contractor who goes out of business because he didn’t charge for his time. Someone ends up paying for the free cost.
When looking for the right contractor for your unique project, there are many things to think about. Although price is important, it shouldn’t be the primary reason to choose a contractor. So, what should you ask your prospective contractor? Here is a list of questions for you to think about, make your own, and then ask your contractor candidates. The most important thing is to trust your instincts and choose the contractor that you feel comfortable communicating with and spending the next 4-6 months working with.