Key Differences Between “Cost Plus” and “Bid” Home Construction Contracts- Pt. 2of 2

Cost Plus Contracts

In this post, I’m going to try and clear up some of the confusion surrounding the Cost Plus type of contract. If you thought that the Fixed Price Contract was confusing, wait till you see this. But if you remember that, “Nothing good comes easy” (I didn’t make that up), you’ll love this contract.
In a nut shell, a cost plus contract allows the Homeowner to pay for the amount of the materials plus a fixed percentage of “Overhead, Supervision and Profit” to the General Contractor.

Pros:
1. In a word, TRANSPARENCY. Homeowners will see, right up front, just how much profit the General needs to make on this project to make it worthwhile.

2. When comparing bids, it’s much easier to ensure that apples to apples are compared.
More importantly, Homeowners will more easily see what was NOT considered in the plans or scope of work; whether or not a General was not involved in the initial design phase.

3. Homeowners can ask for an active role in selecting the best Subcontractors (Finished Carpenter, Tile Contractor, Painter, etc.) in order to keep the quality of the work at its highest and the costs at their lowest. The Subcontractors that have a relationship with a trustworthy General will offer that General a better price as well as more consistent quality and reliability in hopes of continuing that relationship with the General .

4. Because of #1 above, Homeowners can more comfortably ask to write checks directly to the Subcontractors and Material Vendors and ask for a lien release as well as the certificates of Workman’s Comp. and Liability insurance for every contractor and subcontractor working on your project.

5. The Homeowner can negotiate a contract that has NO CHANGE ORDER fees. (no kidding!) Because the contract has been negotiated for actual price plus a percentage, this stipulation is usually a given.

6. Homeowners can negotiate for the “Contractors Price” on all their material costs. Should the General insist on retail? That’s double dipping, don’t you think?

7. The General and the Homeowner can start the project as co-team members working together for the best end result, value, quality, a long lasting relationship. Unforeseen problems arise on every project. It’s best to tackle them from the position of a team player.

Cons:
1. There is no fixed price. A quality General with a good reputation is even more important with this contract to ensure a high level of trust at the start. A good General will be involved with the design process, even if he/she is not a Design-Build Contractor; it’s the first step in working together as a team to bring costs down and value up. All Generals will know where to save money and how to avoid being penny wise and pound foolish when they have a vested interest.

2. The Homeowner can unknowingly pay additional fees to the Subcontractors who will then pay a kickback to the General. This happens all the time. There are stories of Insurance Adjusters who play this game as well. Although illegal, immoral, just plain wrong, I’m told that it happens everyday. One way to possibly avoid this with the subcontractors is to write the checks to them directly. (#2 above) The best way to avoid this is to select a General who has been vetted.

Do you have a good experience with a Cost Plus contract you would like to share? Please do.

Please send me your questions or comments! Sharing your question or problem will certainly help others. You are not alone in your concerns!

If I can’t help with your specific problem or issue, I will work to refer you to a resource that can.