Builder or Remodeler Contract Explainer
Planning to Renovate or Build a New Home this year?
Are you about to start building or remodeling your home? If you’ve selected a builder and are discussing contract terms, you may be debating the merits of a Fixed Price or Cost-Plus Contract.
In this article, we will explain the basic differences between the two types of contracts and explore the advantages and disadvantages of each.
First, A Few Definitions:
Fixed Price Contract: A contract to build your home or complete your renovation with a fixed price that will not change due to unexpected builder cost overruns. This price includes the builder’s profit for managing the job.
A fixed-price contract comes with a detailed scope of work (list of work to be completed in your home), a list of specifications that will go in your home (items going in your home), and budget allowances for any items you need to select, such as appliances or light fixtures. Should you add additional work after the project starts or spend over on the allowance budget agreed upon, those costs would be your responsibility.
Cost-Plus Contract: A contract to build your home or renovate that itemizes the estimated cost to complete the work plus a builder fee to manage the job. Any costs overruns or savings are passed along to the client.
Basically, in a Fixed-Price Contract, the Builder takes the risk of project surprises or savings. In a Cost-Plus Contract, you take the risk of project surprises or savings.
Fixed Price Contract: The advantage of a Fixed-Price Contract is that you have some peace of mind knowing how much your project will cost no matter what challenges your project runs into. If you add to the scope of work, features, and options, or go over your allowance budget, then your price will go up. Those will be conscious choices you make, however, and not a surprise.
The disadvantage of a Fixed-Price Contract is that you can run into disagreements with the Builder about what is included. It’s important to thoroughly check over your scope and specifications to make sure what you want done is clearly outlined in the contract.
Sometimes a builder may add a little budget padding in the price to allow for those expected expenses or minimize their financial risk. In other words, the price may not be as low as possible. This is not always true across all builders, however.
Cost Plus Contract: The advantage of a Cost-Plus Contract is that all the pricing and fees are transparent. You know exactly what is budgeted for. You also know how much the builder plans to make from your project. Plus, if the cost comes under budget, you get the savings. The upside of a Cost-Plus Contract is you can be sure you have the lowest price possible. You also know exactly what your Builder intends to make to for managing your project.
The disadvantage of a Cost-Plus Contract is if your project runs into any unexpected issues that drive up the cost, you are responsible for them no matter how significant they are. A Cost-Plus Contract works best with a very experienced builder or remodeler who knows your area, lot conditions, and project type very well. Builders that are more experienced in budget estimating tend to provide the most reliable pricing.
Take-a-ways: If you would rather have predictable pricing and have very little room in your budget for increases, the Fixed Price Contract may be a good fit. If you like to roll the dice and see if you can keep your costs down, the Cost-Plus Contract may be the better option.