Cost-plus Contract When Building a New House

We built our home that way. Very satisfied with our contractor and the finished product. It was nice for us, because when it came time to buy appliances, for example, I was able to go and buy them myself (at a discount to me for buying several at once during an appliance sale at Sears and getting a huge rebate) vs. choosing from a list somewhere else and paying an added percentage on the appliances along with the rest of the house. I gave all the specs on the appliances to the cabinet maker, and everything fit and was installed perfectly. All I had to do was find out when they needed them delivered to the site and that was that.

I found that it gave me a lot of leeway in choosing materials. If I wanted a particular shower head in the master bath, I chose it. No worries about if it was off a list of items provided that would fit into the contract costs. If we decided to splurge on something... we did. If we decided we didn't want a particular "upgrade" then we went with a less expensive choice. It was very nice to know exactly what it cost to have THESE granite counters as opposed to THOSE granite counters... Or to decide to add a built-in bookshelf after meeting with the cabinet guy. We knew that our builder wasn't upping the pricing on any items to give himself a bonus... he made his money off whatever upgrades we added in automatically.

Our contractor priced out his "typical" work for us with our plans, and then we made adjustments to what we wanted based on that. For example... some builders only install 3" baseboards... anything larger costs more. Well, our builder's 'standard' install for baseboards is the 5" ones. So that is how our plan was priced out for estimation purposes.

It is important when you are doing the estimate with your builder to find out what he is basing his figures on... some builders don't even install window trim if you don't ask for it! So make sure that you are getting enough information when you sit down with the price list and write out your contract.

I am one of those people that, when given a group of items to choose from, always end up choosing the most expensive item... without knowing any prices on anything. So it is very hard for me to go into a showroom to pick floor tiles, and be told that you can choose from "these", but "those" over there aren't included in your choice list. If I want "that" one, that's the one I want. I want the one I like the most that we can afford... and if happens to be $.20 a sq ft more than what we were allocated by some contract price plan, then I am going to be ticked! So I found that we had a LOT of flexibility when it came down to the finer details... dimmer switches here and not there, Sat TV wiring in THESE rooms, this many colors of paint, this type/size/pattern of flooring, these cabinet pulls, (or no pulls at all!)

We also were able to decide halfway through the building process, that we did in fact want to add a pool. No problem. We didn't need to rewrite the entire contract. We actually met with the pool company, got our estimates directly from them, and all the bills were forwarded to our contractor, who, by the way, never asked for a dime up front for ANYTHING.
Maybe we just got lucky.... be we had a wonderful experience. Far better than our first go-around building a house with fixed amount contract.

I have been in the construction industry my whole career (I now manage several construction project managers, estimators, etc for a commercial construction company). What I can tell you is this. No matter whether you go with a cost-plus contract or a fixed amount contract, be absolutely sure that you have a good set of plans (i.e. a good architect who is VERY detail-oriented) and that you have really thought out what you want prior to getting bids on the project.

The bids you receive should be itemized by trade (for instance, framing, plumbing, drywall, paint, tile, HVAC, general conditions, supervision, etc). Get at least 3 bids from qualified contractors. Check their references - ask things like, did he complete the project on schedule? Were there any unforeseen conditions, and how did he handle that? At the turnover of the project, how did he handle any punchlist work that came up? How was the quality of the finish work?

Before you start construction, make sure you have a copy of their workers' comp insurance, liability insurance, and vehicle insurance with yourself as additional insured (IMPORTANT!). As long as you are additional insured, if the policy is canceled, you will be notified. Obviously you don't want someone working on your home who is not fully insured. We had a neighbor once who did not take this advice, and a worker fell off her roof. He was seriously and permanently injured, and then she found out that his worker's comp policy had been canceled. The injured worker sued her. Just a word to the wise...

The other thing you want to be careful of is any contractor who expects money up front. For materials purchases this may be ok - I have even worked with clients who have gone along with the project superintendent to the lumber yard to pay for materials themselves. If you have the time to do this, it's a great idea since it will save you on parts markup. But you want to be very wary of a contractor who says he wants 25% up front. I've heard of many contractors who have taken the money and run, or taken the money and not paid all their suppliers (which could mean a lien on your house). So don't be afraid to ask a lot of questions, purchase materials directly from the suppliers (with the contractor present), ask for receipts, time cards, etc. A good contractor won't mind.

All that said, when we bid projects at my company, on a fixed price contract we do charge a bit more in order to cover ourselves against possible overtime work, weekend work, etc as may become necessary during the project. Generally speaking, a cost-plus contract, if you manage the project carefully, is cheaper. Just make sure the words, "While you're at it, why don't you go ahead and..." never come out of your mouth. That's where the dollars start piling up. =)

I have not done a cost-plus contract for any building. However, I have a very good friend who runs his own construction business and almost always does cost-plus projects. Based upon how I've seen him run his business, which is done in a lot more haphazard way than I would run a business, I highly recommend you find out details on his system for keeping track of the expenses. Find out who is allowed to purchase the building products - i.e., day laborer, supervisor or does he/she do it himself. I see my friend come home at the end of the day with receipts from Home Depot, etc. and he often can't be entirely certain what job they go to because his workers haven't properly labeled the receipt. Also, ISTM that they plan very poorly and thus my guess is that products that are not needed are purchased. So, I would ask to see a sample list of material expenses - e.g., from another job, to get an idea of costs and the builder's system.

Based upon what i know, I personally would not do a cost-plus job except in the case where you know the system and/or you know the supervisor/owner personally and they can show you their system.

I plan to have them build my deck, but the supervisor is a very good friend and I will be going with him to pick out and purchase the materials directly, so the amount I pay them is for labor only. And, even though this is a friend, I do plan on getting other bids and doing my own estimate of costs for building materials and an estimate for labor (building in buffers) just to see if it will even be cheaper for me to go that route.