Cost-Plus and Fixed Contracts with Contractors Cost-Plus and Fixed Contracts with Contractors

When building or remodeling a home, you will be confronted with various contracts from contractors. Some will be presented in a professional form, while others will be hand-written or sealed with a handshake. Regardless of the type of contract presented to you, it is important to verify the terms of the agreement. You will find two types of terms presented to you: the cost-plus and the fixed contract. But which one is best?

A cost-plus contract is a common inclusion in contractor agreements. This term means the contractor agrees to supply labor and materials for "x" amount of dollars, plus any extras on top of that. This type of agreement leaves the price open to circumstances encountered by the builder. For example, an excavator may quote $9,000 to grade your building lot. But say there is a large tree which requires extra digging to be removed. He will charge you the base price of $9,000 plus the cost of removing the stump and roots. The cost of removing the tree may be minimal, but coupled with any other surprises (such as rock, importing or exporting of dirt, etc.), the $9,000 bill can quickly double.

Contractors prefer this type of bidding because it relieves them of sticking to a set price. Obviously, hauling away dirt, stumps, and other debris is going to cost the contractor more money. However, he passes this cost along to you, the homeowner. This also means he does not have to be as accurate in his initial bid because any extras will be passed directly to you.

A cost-plus is the riskiest type of contract to sign. You may be handed a bill twice the cost of what you agreed to initially. When working with a fixed budget, this can mean disaster. If you sign this type of agreement, you have to hope that no unforeseen circumstances are encountered by the contractor. However, in construction, surprises are a part of the business. Construction would not be construction without surprises!

The more favorable contract is one with a fixed cost. This means the contractor will supply all labor and materials for "x" amount of dollars. If he missed something on the plans and it ends up costing more, he has to absorb the cost. This puts responsibility on the contractor to be thorough in his bidding, because after all, he is in business to make money. This type of agreement protects you from contractors looking to take advantage of homeowners. They will not be able to charge you thousands of dollars more because "something was missed" on the home plans.

Do not be surprised if you find a price variance between fixed and cost-plus contracts. A cost-plus contract will typically be lower than a fixed cost bid. The contractor wants to protect his profit, time and energy, so he will typically bid a fixed contract higher (to guard against mistakes). With a cost-plus contract, he may be more apt to bid low, knowing he can charge more if unforeseen circumstances arise. Homeowners often settle on the lowest bid as a way of saving money. But in the long run, a cost-plus contract may cost you more than a fixed price.

In all fairness to contractors, they encounter homeowners who constantly change their minds. This often results in increased labor and materials needed to complete the job. It is not fair to have a contractor provide a quote on one idea, and completely change your mind and expect him to hold the same price. Decide early what you want from the builder and have him quote a fixed price for the work. This will save you time, headaches, and a lot of frustration during your project.

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