Split Down the Middle

           Just like life, comparisons of Fixed Price and Cost Plus contracts have no either/or equation.  Without advantages and disadvantages to both, the argument would have been put to rest a long time ago.  It does not have to go on forever, however, when a little creativity and education can lead to solutions that combine the best of both.

            Contracts are fear based and only necessary as a resource to cover the contingencies for when and if something goes wrong.  If all the smiles and good feelings could last as the work was completed, there would be no need beyond the handshake, but in remodeling especially, surprises do occur and disagreements almost always happen.

Tough questions

            The bottom line is that owners have a budget stretched to the max and enter the project terrified it will still cost more...a whole lot more.  Quality is also important.  They do not want dust in their lives any longer than necessary and they want to know the builder will be around to fix any problem.

            The builder wants to be paid on time and fairly.  Period.

            A contract that meets these issues is the mutual goal.  The type of contract finally signed gets the project started, but more than the ground rules, the agreement subtly establishes the kind of relationship going forward.  Like love, we enter full of hope and the best assumptions and are usually at least willing to consider divorce somewhere along the way.

Plan A, B and All of the Above

                For a fixed price, the builder takes all the financial risk and races to completion with fingers crossed.  In a cost-plus contract, hands need to be held: reassurance is as necessary as the broom at the end of the day.

            A fixed price contract full of allowances or a cost plus agreement with a cap on specified areas are both ways to align what often seem like opposing needs between the home owners and builder.

Selected Items               

           Novice contractors can often be caught estimating a standard grade toilet and have to mask their surprise later or risk ill-will when the client finds the second most expensive choice in the catalogue.  A 2x4 is a 2x4, but so many features in a remodel are not generic.  The difference between painted and stained trim, for example, is a huge expense to swallow if it was not clearly defined in the price tag.

            Identifying the variables that require choice and naming a specific dollar amount--even if open-ended--grants the owner the satisfaction that the change is in their control.  Color choices, siding type, fixtures and doorknobs are all important and oh so subjective points of distinction where clarity makes all the difference.  Eliminating obvious surprises makes the rest less painful.

            With no victim, no one is hurt.

Not to Exceed    
            Placing a cap on costs while still operating with the flexibility provided by a Cost Plus contract is a solution from the other direction.  Arms and legs are not threatened when limits are placed either at the top or on quantifiable areas. 

            To alleviate concerns about gauging and motivate profit incentives, the difference between the actual cost and limit can be divided between the owner and builder.  Bonuses can be placed on timelines to ensure efficiency.

            Some aspects like the roof replacement can be estimated and billed as a line item at a fixed rate while something unknown like reversing a stairway can just be estimated and billed out accordingly.  This requires a little more education for the laborers to track their time accurately, but provides peace of mind for all by being transparent and fair.

Attitude Adjustment

            Accountability is key.  Presenting a bill with labor lumped all together as a single item creates distrust while dividing them by worker and categories makes the owner less inclined to count them from behind the curtain.    

            The point of a contract is to be fair and clear, to avoid misunderstanding and provide a resource to settle disagreements.  A partnership is preferred to an adversarial relationship.  The tools are available to make it so that the owners in the end can be comfortable stepping out onto the balcony they just paid so much to have built.

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For What it Costs

          Time and material, or cost-plus contracts, first appear to homeowners as a blank check for disaster when contemplating a remodel.  Unknown conditions and unscrupulous reputations create boogies that make any Halloween night seem tame.

            As part of the decision or after deciding on a builder, the next important bullet point is the type of agreement that will set the tone for the relationship throughout the course of the project and possibly far beyond.  The consequences are potentially huge and indefinably dynamic.

            A fixed price contract is the first most obvious choice for the owner who expects to purchase a remodel like a shirt off the rack.  For the agreed price of X dollars, a list of details is established to be completed satisfactorily before payment is issued; no surprises and only negotiated pain.  While it is clean and seems risk free, the line in the sawdust, unfortunately, has less obvious drawbacks.

            With little room to cope for a surprise behind wall number two or unpredictable conditions of weather and sub schedules, the contractor, no matter how conscientious, may be forced to make compromises to minimize the damaging effects to his own best interest.  The fixed price forces a focus on profit over quality that may not be apparent until paint peels or the floor finally squeaks in alarm a few years later. 

     Conversely, if all goes well, the homeowner ends up paying much more than it actually cost.               

Shoulder the Risk

                A contract based on the actual cost with a mark-up for the contractor's efforts may feel like an open wound about to bleed profusely, but with proper bandages applied, often ensures a completed project with a more balanced result.  Better than a win-win, the contract that pays for what it actually costs can create a trust between the parties that makes an ordinary project brilliant.

            A time and material contract shows every invoice for materials and sub-contracts, adds an agreed upon percentage for the contractor's risk and warranty, and charges labor at specific rates per hour.  Bills are presented weekly or twice monthly and due immediately, providing full transparency and continuous opportunity to re-evaluate the relationship at each juncture.

            In this version, an honest relationship is critical and attention to detail ensures a good outcome.  The builder makes every decision on quality first and cost second while the owners are able to tweak the design without constant stressful and time-consuming re-negotiations.

            Assuming there is not the luxury of an unlimited budget, the builder is not forced into the position of always saying "no" to changes or having to seem like a "nickle and dimer" having to revisit the contract at every new idea.  It is important, however, to regularly update owners on the effects of apparently small changes that can actually change the bottom line significantly. 

Trust the process

                The most important concern in a time and material contract for the owner is that the labor cost will be out of control.  Owners can be quickly consumed by the minutia of pennies and lose sight of the dollars saved by efficient planning.  Animosity can brew while the carpenter whistles merrily along.

            It is easy to be swept up in a day of counting coffee breaks and judging production on the basis of over-heard conversations. Idle stances may disguise industrious calculations and a casual huddle may not show the hours saved in scaffold building afterward. After two days of absence, the quality of doors painted in a dust free environment is missed in the lack of apparent activity.    

Accountability & Communication

            With today's software and text messaging standards, there is no reason to leave customers or builders in the dark as the process evolves and questions arise.  Fears can be quickly and easily laid out for solutions.

            Programs like Quickbooks, the industry standard, can easily tabulate every nail and hour on or off the site.  Microsoft Project and other CPM software present a schedule and chart the deviations and delays.  A spreadsheet comparing the estimate to the actual costs with projections to finish can keep anxiety under control.

            Ultimately, the kitchen table still reigns supreme at the end of the day where a cup of coffee or cold beer keeps the conversation human and on task, focused on the facts.  The ability to speak openly as partners on the project makes all the difference to the quality as egos and ownership are dormant and the goals are aligned to make it the very best it can be.

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