Cost Plus vs Fixed Rate, The Great Debate

First off let me start by saying I don’t really enjoy talking about money, and I’ve never lived my life on the basis it. I got into this business as a creative outlet not to make millions of dollars. But I also always knew the money would come as long as I was following my truth and passion. That said, here are my thoughts on the two most common approaches to residential construction contracts, after experiencing my own share bumps, bruises & successes over the last 11 years experimenting with each.

Cost Plus- To the client this sort of feels like writing an blank check right?…of course it does, they are agreeing to a contract and you don’t know exactly what the price is going to be. But that’s also because they don’t know exactly what they want. And hey, no one is judging…just articulating the reality of why this scenario feels more open ended, it’s simply because IT IS.

  • Client Pros- speed, agility, & quality control of almost every aspect of the finished product. More HANDS ON. The project is client and quality driven.
  • Client Cons- vulnerability more grey area & less ability to clearly control costs. Also potential for more client accountability.
  • The super high-end projects are almost always done this way.

Fixed Rate- an extremely rigid contract structure. Client is putting their faith in the fact their architect and/or designer planned everything almost perfectly, otherwise they could be spending a large sum of money while still settling for a “custom” home they don’t actually LOVE…or risk getting hammered by change order fees, subsequent project delays and possibly even resentment depending on the outlook of their builder (who may also be seeking a swift moving black and white scenario, that’s often times more about getting it done according to plan than making it perfect to the client). It’s just a lot less of a personal experience during the build.

  • Client Pros- less decision making & involvement required during construction, price does not change if scope doesn’t change. More builder and architect accountability.
  • Client Cons- having to pick out almost everything up front…really, who can do that? Less involvement during construction. More financial penalties and potential for frustrating delays when you want to change your mind. Fairly HANDS OFF for the client.
  • Minus an allowance item here and there, after construction documents are complete the creative process is essentially over. The build is now a business and budget driven phase. How much, how long?

Personally, I don’t like either one of these contract structures independently. Both have severe flaws and weaknesses in terms of creating the optimal builder-client experience. What do I think is the correct approach? Well I’d say a “hybrid” somewhere in between and that every situation and “agreement” is truly DIFFERENT, and almost no matter what will require some level of compromise from all parties throughout the process. As a builder find you own style and instead of leaning on perfectly worded contracts (though solid contracts are always ideal), hang your hat on developing real life relationships via multiple meetings in the pre-construction phase that evolve organically into friendship, communication, and trust. And if the correct vibe and mutual understanding doesn’t exist after putting in the necessary time and energy required to truly get to know one another, than I suggest using that all important escape clause, and simply not moving forward with the build, PERIOD. Don’t force it…

In summary, when building “custom” homes I recommend (after reading numerous industry standard contracts first) writing your own simple straight-forward yet “customizable” contracts tailored to each unique client and situation, while anticipating, welcoming, and prospering the human factor. As the builder, it really is your job to READ into all of that. Go out of your way to get to know your clients and ask them all about their goals and priorities upfront including quality, timeline, & budget, and skillfully manage ALL of those expectations or risk an unhappy experience for yourself and the people you are supposedly serving. Yes fellow builders, we are in the service industry, so let’s OWN IT (or become developers). Cheers!

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