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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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.

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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.

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Orange Apples

If we could just imagine our best dream home and blink it into being, life might be wonderful, but a significant segment of our workforce would need to learn another occupation. In the natural order of things, the planning stage of a renovation, often rushed, is just the start of a process, long or short, that can result in a home full of frustration or a work of joy, depending on how the details are approached.

needing room to move

Houses can be like a model airplane, a kit purchased at the drug store with a set of directions and snapped together as easily as following steps one through ten. Renovation of a home, in comparison, is a much more complicated and amorphous process, custom fit to the needs, taste and budget of the owners, but characterized also by the skills, personalities and preferences of the people hired to accomplish it. Truly a work of art, a remodel reflects the energy of all involved.

Because of the stress, complications and inconvenience, many homeowners accept what is or choose to move to what works, avoiding the potential disruption and mayhem that a remodel may produce. Others, by inclination or necessity, undergo a renovation to create a home as close to their dreams as they can manage.


No matter how beautifully conceived and well-planned a project might be, it inevitably changes for many reasons during the process. Inclusion early on of the builder who ultimately constructs the dream out of the nails, paint and trim is well-advised.


Act with Discernment
Once armed with a set of plans and pages of specifications, conventional wisdom recommends to put the project out to bid and pick the best apple out of a few. The bid process, however, even if between pre-qualified contractors, might ensure the cheapest price, but rarely identifies the best fit.

Prejudice openly admitted, as both a builder and client, I have countless experiences of how the dollars saved in the rosey bid-process are often quickly overwhelmed, even in the easiest of projects, by the thorny issues of misunderstandings, miscalculations and miscommunications. Translation from paper to reality is difficult enough to accomplish in the best of circumstances without the added insult of adversarial interests that arise out of agreements written on stone foundations.

The most important ingredient to a successful project is the chemistry between the participants.



Do the Work
Pre-judgments about the dented truck and paint-stained clothes might show less about indebtedness and miss out on the man who actually uses his hammer as much as his sharp pencil. A successful look in this business may be more of an image than actuality. Some prefer to have recourse to an office and staff that never get dirty, while others want to shake the hand of the one who will do the work.

under construction

While websites offer the freshest look and most information about a builder, the Yellow Page ad still demonstrates a professionalism that does not come cheaply. Names on the side of trucks and attractive signs on job sites show an attention to detail that might reflect the care that could go into your home.

Ask neighbors, family and friends for referrals to begin the search and follow up privately with a phone call or even a visit to see the homes suggested by the prospective builder. Naturally, they will want to show off only their best jobs, but asking them to talk about projects that did not go so well offers the chance to gauge their honesty, flexibility and, most importantly, their comfort level in dealing with the tough stuff.


Trust your Heart
Just as a renovation requires room to move, rip and tear with well-placed protections like dust barriers and drop cloths, so does the relationship between builder and client. For the time being, the home will be invaded by carpenters as busy as ants and a lot noisier. Precious dollars are going to fly out the door and new windows like so much saw dust in the wind. A contract with fixed prices and specific details is a good place to start the conversation, but is ultimately only as good as the contractor hired to complete it.

Often defined as the way to separate apples from oranges, the bid process fails to address the differences between Granny Smith and Macintosh. No historical information can predict the particular circumstances of the impending project. Even the very best might still trip and stumble in the months ahead for hidden reasons in his personal life.

dream delivered

In actuality, there is no magic formula to guarantee the perfect project. At the time of decision, it is vital to set all the information aside and take a close look at the invisible messages that intuition contributes. An art that is inherently flawed nearly by definition, it is vital for home owners to align themselves in a relationship of trust, respect and even partnership, something that is often discovered only in the leap of faith from heart to heart.

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Open or Closed Doors

As long as there is work to be done (and there always will be, remembering that shelter is a basic necessity), people will have to consider the difference s between Fixed Price and Cost Plus contracts.

The first is exactly as it implies: the contractor commits to a scope of work for a specific dollar amount and completes it, no matter the cost to him. Cost Plus (also known as “Labor and Materials”) charges for every invoice incurred, plus a percentage, and labor at an hourly rate.

No easy answer is available here to client or contractors. Pros and cons for both are so complex that ultimately each can be considered for any size or shape of project. The contractor, in theory, having more experience, can be prepared for both, and direct the client towards the one that is most advantageous to the circumstances.

At first glance, the one paying gravitates to a Fixed Price. You go to the store, pick out a shirt, put the money down, and it is done. Conventional wisdom says construction always goes over budget so the client wants to nail it as firmly as sheathing to a rafter, and banks absolutely insist on eliminating the risk.

In this case, the builder makes a bet that he can twist his predictions into reality, trusting that he has considered every problem and counted every stick. Unfortunately, he has little room to wiggle out of a more expensive sub-contract or an over-looked detail. Constant renegotiation, no matter how legitimate, smacks of “nickels and dimes”, or “low-balling”, and alienates the relationship. It is usually better to absorb the losses in the hopes of higher profits.

In a Cost Plus contract, the dollars accumulate in direct proportion to the project, no risk to the builder who shows up, produces a kitchen and gets paid. Less potential for a “killing”, he also, in theory, pays his bills and can count on his own paycheck at the end of every week.

The risk now falls on the owner. Construction projects usually do run over budget, but more often by choice than by mistake. It might cost fairly what it costs, but the owner and builder must have pencils sharp enough to pay for it all.

Size of the project and personalities of the parties play an important role in the choice of contract. As a rule of compromise, in new construction--which is so much easier to predict--a fixed price establishes a clean bill and an easy list of details with specific dollars attached. A remodel, potentially hiding surprises behind every existing wall, lends itself to the organic flexibility of a Cost Plus agreement.

How easily trust can be established in a few short and agenda-full meetings influences the choice. Ultimately, one’s comfort with risk is the ultimate decision.

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