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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Whole Life Make-over

No matter the degree of our comfort level, the world has become an unsettled place. Riots and revolutions, earthquakes, tsunamis, droughts, tornados and economic collapses can be seen as the apocalyptic precursors predicted and parodied to culminate in 2012.

The housing market that has been blamed for much of the downturn of the last few years still struggles to come back and is forever radically changed. Sub-prime mortgages have resulted in a banking industry too focused on profits to take a risk on the common family just wanting to buy a home. Stuck with an inventory, developers are hesitant to bulldoze fields into suburbs, making renovations to existing homes the most viable option for bettering our quality of life.

In the good times, our culture tends to be mobile and impulsive. As an expression of success, the standard has been a bigger home in a better neighborhood easily accomplished by a quick move across town. Proceeds from the sale of one put the money down on another and payments remained largely the same. Assumptions that values would continue to rise made playing as easy as the game of checkers.

Sub-prime mortgages changed all that and it can no longer be the expectation that anyone who works hard enough can earn their own home. Real estate is accumulated by fewer and fewer people who rent it out to the many. Ownership is less a right than a pride and privilege.

Staying put and renovating to meet expanding needs for many reasons is a wonderful way to spend a lifetime. Deep roots, relationships with neighbors and the creation of traditions are just a few obvious reasons. Nothing better than a well-established home life can assuage the discomfort of global uncertainty.

On the local level, the decision to stay put and improve the home can be a terrifying prospect to those of us raised in a lifestyle that used houses as commodities so easily bought, sold and left behind. Often brand new, we have not stayed long enough to enjoy the shade of the trees we planted, nor shared the celebrations and sorrows from births to graduations to weddings of our neighbors' children who are friends with our own.

Renovations are dusty, inconvenient and hugely stressful, lasting one or many months. The contractor and workers invade the castle, often becoming part of the family in that time, sometimes the enemy. He might turn the corner and catch you in your underwear or arrive at three AM to tighten the tarp in a rainstorm. Homework still has to be done; holidays arrive; visitors want to tour and advise.

Marriages are seriously tested living through remodels, often stripping and re-painting the relationship in unexpected colors for better or worse. At the design stage, one man's recreation room bar is the woman's whirlpool spa. The screaming saws of construction might sound like the pitter-pattering little feet to the other. Constant decisions as small as round or lever door handles create relentless strain when all he really wants to think about is a round of golf.

Despite it all, the process of transformation, with proper planning, care and room for breaks, can be a time of great joy, anticipation and satisfaction. Lives are changed by taking the wall out that has separated the kitchen from family. The extra bedroom can save a marriage or unite sisters who could not share the same space. Staying in the same school system avoids the traumatic disruption of having to make all new friends all over again.

In thirty years as a contractor, my best of many moments is easily identified in the eighth month of a year long project that doubled the size of the house and touched every room existing, centered upon a massive restructuring of the kitchen. With a two year old, she had been washing dishes in the bathtub, the heat was off for the day in February in Vermont. The entire first floor of furniture was crammed into one room with a tiny path to the computer where she huddled in a down jacket.

"I love it!" she exclaimed, mist on her breath.

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Confessions of a Sub-Primer

I am a contributor to the sub-prime fiasco.

So much blame for the current economic crisis is placed on the shoulders of the mortgages made to people with less than stellar credit desperate to buy homes they could not afford. The rising rate of defaults on these so-called predator loans, it is explained, has shaken confidence around the world, and the entire economic system is on the verge of collapse.

This bail-out package has been rushed so quickly—desperately—to vote, one wonders if taking just a little more time might uncover better solutions. If, in fact, failed mortgages are at the root, why are we not looking at supporting those mortgages instead of bailing out the “evil” men who made them? This answer seems just as poor a decision as the one that made me sign that mortgage in the first place.

In the super-charged economy of pre 911, when contractors had all the work they wanted and not enough labor to get it done, I rushed along, putting unqualified people in place, making mistakes that tumbled my company into serious debt. Unwilling to face bankruptcy, over-confident that money alone would cure the shortfall, equity in my home seemed the best way to rescue my company, the men, and our families we were feeding.

My own credit had been destroyed in the effort to pay bills late instead of borrowing. Taking advantage of “No doc” loans available, we used my wife’s name, supported by my unproven income.

The interest rate was an affordable 6.5% for 3 years. The processor agreed enthusiastically that I could rebuild my credit and refinance by then, and rates were holding steady anyway, unlikely to rise. I even checked the index rate that would trigger an adjustment and was again re-assured.

So with hope and optimism in ourselves and our commitment to work hard, and in desperation to bail out a business that could turn profitable on the very next project, we met with the courier, and my wife signed the papers. What I did not see in the pages of fine, fine print--rushed through and signed in under 20 minutes—was that the link had enough points over the index to guarantee adjustment upwards.

It angers me to hear commentators speak with scorn of the people who made such decisions. We, The People, who are leading desperate lives to pay these mortgages of 12% are just as much “Main Street” as the citizen asked to pay for the bailout. In fact, we have to pay the mortgage and our taxes.

I chose this option when it was a rate I could afford, but as payments have risen more than $1,000 a month—money that goes entirely to the profits of the lender--my back has been slowly, painfully broken.

The demise of my business, the dissolution of my marriage, the search for a new career cannot be blamed on the sub-prime mortgage fiasco. The desperation to solve financial problems was an imposing factor. I am fortunate to be able to sell my house and get out from under this pain. I know there are others in neighborhoods who have lost all value and are forced to just walk away.

Perhaps there could be a solution that simply adjusts these mortgages back to the original affordable rates, and supports those unable to pay even that. People remain in their homes (perhaps other marriages can be saved), lenders see fair and modest returns, and confidence is restored.

Very simple, yes. But like a frightened child, I am listening carefully to the arguments and reassurances of our President and Congressionals sitting around the kitchen table late into the night. They want to leverage the perceived equity in our government’s home and it sounds eerily familiar.

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