Fixed Costs

A major decision for home owners before embarking on a renovation is whether to agree on a fixed price with a contractor or build the project on a straight cost basis. The question, in one form or another, has been around as long as carpenters have been competing for work.

                A fixed price or lump sum contract is when the builder estimates all costs, allows for contingencies and marks up for profit, presenting a bottom line to the owner.  If actual costs are below the estimates, he wins; if overages occur, the problem falls on the builder.  There is no going back to cry, "Ooops!"

                A time and material contract, also known as cost plus or T&M, arranges reimbursement to the builder for every invoice with a little extra percentage for the trouble and warranty.  It costs what it costs and the risk for the owner at the beginning feels like a potentially whopping blank check and the reputation of being a fool.

                Of course, there are variations in between these two options and no single version works for every client, builder and circumstance.  Once again, the answer boils down to the matter of trust and the comfort zone of risk each party is willing to hold.

                Fixed price contracts are every home owner's first choice.  When we go to the store to buy a shirt, we look at the price tag attached and pay it without negotiation or concern for how much each of the buttons, fabric and thread might have cost individually.

                Often the initial phone call to a builder includes the desire for a square foot price (the average total cost divided by the square footage of the area affected) which is really an inaccurate measure for a remodel, considering the size, scope and complications have no average.  At the end of the first look interview, after numerous ideas have been bantered around with no clear decision, the potential client inevitably asks for a ballpark figure ("I won't hold you to it," they promise), a wild guess that either sets the bar at a ridiculously low number against which all is measured or whacks the builder right out of the game entirely.

                After careful consideration, the fixed price contract defines the size of the field, all the rules and players, even declaring the home owner a winner while the builder never knows until the dust has settled and the green grass is grown in how well he has done.  Settled on the price, the owners can go on to deal with the physical stress of disruption and door knob decisions, well-prepared to have checks ready according to the schedule in the contract. Relieved from most painful surprises beyond inconvenience, the job gets done and they transfer the funds.

                The builder also enjoys the benefits of planning and if all goes well, packs up tools with a tidy smile and a thicker wallet.  A clear payment schedule and description of scope, defined allowances and method for change orders, and the orderly completion of tasks creates an equally seamless flow that turns each large check into countless smaller checks good to their subs 30 or 60 days later, or to employees that very same Friday.  Everything lines up and everyone is happy.

                The problem in a fixed price contract arises when Mr. Murphy appears to blow the best laid plans away.  A simple, but large line in the estimate might have been miscalculated (computers can do that, ha-ha) or misplaced entirely.  Bricks instead of wood might be hidden unconventionally inside the wall.  The customers may be so convinced they said "blue", it is better to paint the room over than to argue the point and fail to receive the check that is needed that Friday to bring the plumber back on Monday.

                To keep the labor cost under control, certain tasks are inevitably hurried and corners might be cut more quickly, a little more squarely than round.  The in-stock sink could be purchased instead of the special-ordered extra (and more expensive) myl of stainless steel, looking just as shiney upon installation, but showing scratches much sooner.  The decision to let a bad cut fit or replace the board can more often land on the cheaper side of "close enough."

                Conscientious, well-organized and financially comfortable builders do just as well as the home-owner with fixed price contracts, often better than with the less risky luxury of  a cost plus contract.  The underlying costs, however, in quality and dollars could eventually add up to far more than fabric, thread and buttons combined.

Please share with your friends

Tweet Follow @KipdeMoll

Nailed Down

For most projects, the most important and over-looked tool is the contract. Large or small, a clear agreement in writing and with signatures can avoid more damage ultimately than the shoddiest roof.

During the courting period and initial stages of projects, everyone is on their best behavior and words, far more than actions, are setting the tone. Purposes are aligned and the satisfactory completion of the project is beautifully envisioned.

When problems arise, however, the true strength of the relationship is tested, bending and relaxing under the stress or suddenly snapped by the weight of unforeseen pressure. A well-written contract can provide the support and recourse to keep negotiations and ultimately the project itself on track.

Like a pre-nuptial agreement, many people--especially hearing that it will only be a day or two, in and out, for sure--waive the formality. The implication of distrust may create animosity and feel like an insult to integrity, but a professional with experience understands the legal binder protects the contractor as much as the homeowner. There are as many nightmarish clients as bad builders.

The size of the job can determine the complication of the document, but for any project, the basic agreements should always be in place and well-stated. Similar to the journalistic rules of a first paragraph, the who, what, where, when and often the how should be clear in every contract. Most importantly are the clauses relating to "how much and when".

Smaller jobs can be a one page proposal with space for signatures to accept the terms. The vitals are still necessary, even if stated as casually as "replace the kitchen sink" at an hourly rate of "X" plus the cost of materials (with a mark-up). The proof can be in the process as long as the outcome threatens not to break either bank or back.

In my own business, the division came at about $1,500, more than a week's worth of work, or involving several distinctive components. A mid-size contract with more detailed specifications naming the type of door, quantity of siding and allowances for choices that could be open-ended ensures the two-headed purpose of protection and flexibility.

The larger projects invite multi-page, multi-tiered documents covering the basics, coloring the details, connecting the schedule of payments with performance, and carefully delineating ways to separate should that become necessary. Room for change is still important, even as details are crossed and contingencies dotted.

Architects and lawyers often advocate a standard contract which is easily available through the AIA. While it provides valuable clarity in commercial situations without a lot of expensive negotiations, home owners can be overwhelmed by inappropriate clauses and the builder too constrained by the stringent definitions. Simple is better and a contractor with enough experience to do the job should be able to produce a tried and true document off his word processor.

With a contract so specific, the temptation is to name a hard, fast and intractable dollar amount, but all of my experience--given a strong sense of mutual trust combined with a good estimate and specifications--an agreement based on actual cost is the fairest to all concerned. With clear parameters, solid budgets and honest communication, time and material contracts work very well.

Regardless of the best made and laid plans, things change and room must be made for Mr. Murphy to show an ugly face. Allowances and change orders are important parts of any agreement and coverage must be in place in case disaster leaks through a roof, spills out of a can or is short-circuited by a wire that should have been there, or worse, should not have.

Once a wall is framed, the view might invite a window that was not originally figured into the job. While the temptation and urgency of the schedule might dictate a quick decision to proceed and figure out the cost later, postponement of the cost implications can have serious repercussions burning a deep hole in the pocket of the builder or a terrible sticker shock long after the fact.

Regardless of size, a written contract is the best tool to ensure a project goes smoothly with as few negative incidents as the law of averages guarantee will happen. The comfort and ease with which one is negotiated will often be an indication of how well the parties will work together throughout the adventure.

Please share with your friends

Tweet Follow @KipdeMoll