Construction Contracts

 
 
Construction contracts can be confusing, especially to clients(who probably don’t deal with them every day like we do). My firm typically operates with two different contract options: Cost-Plus Fixed Rate & Fixed Rate. Here is my best attempt to explain the differences.

 

 

Cost-Plus Fixed Rate: You pay the actual costs of the labor and materials(which vary above or below the estimated labor and materials), plus an agreed on fixed-fee to the builder(covering supervision, warranty, overhead, profit, etc). 

 

  • Ex: Labor was estimated at 50K and Materials at 40K with a Fixed builder fee of 15K    (105 K Total). 
  • Actual costs of  Labor=48K, Materials= 41K, Fixed Builder Fee=15K (104 K Total). 
 
This example shows the client paying 1K less the the budgeted amount. The variation can go either way though, sometimes the actual total is more than the estimate, sometimes it is less. Call it a roll of the dice if you will.. That said, this contract typically results in the optimal price for the client, usually saving them money. 
  • Trust is huge with this type of contract. A sense of teamwork is created between design professional  builder, and client! Flexibility is increased all the way around.
 
Fixed Rate: You pay one price period. If the builder comes in under budget, then he/she pockets the difference(plus whatever builder fee they input to create their estimate). If the builder comes in over budget, he/she eats the overage(not the client).
  • Ex. Fixed Estimate was 105K
  • Actual costs totaled 103K
This example shows the builder pocketing 2K on top of whatever they input for their builder fee(lets say 15K), so total gross profit(before paying out overhead) for builder was 17K.
  • On this one the builder came out on the good end, but remember it goes both ways! 
  • This type of contract requires less trust, and less teamwork between design professional  builder, and client..as things are more black and white. This contract also allows for less flexibility in my opinion.
 
Of the two contract options mentioned above, our clients typically opt for the Cost-Plus Fixed Rate(about 75% of the time). I would say that is our preference too, because we prefer the sense of TEAM created. But, we actually do prefer to use Fixed Rate contracts on small jobs(anything under 50K), for simplicity sake. Hope this helps some of you out there! 

DC

Doug Cameron is a Healthy, High-Performance Builder & Remodeler with EcoSafe Spaces, LLC in Austin, TX.

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