Cost Plus vs Fixed Bid

Why it's best to choose a ‘fixed bid’ home builder over a ‘cost plus’. The trend in construction is that most companies prefer a ‘cost plus’ formula for providing homeowners an estimate. And for many good reasons, although these reasons typically benefit the builder and not you. Do you understand the difference between a 'fixed bid' and 'cost plus' builder?

If you were to drop off your car at a mechanic’s shop, it would be easy to see that this person has been trained. They often have proof of their training hanging on a wall. But with home builders, there isn't a required knowledge test before you are given a business license. For a small fee you can become licensed, bonded, and insured in a week or so. This is not the case with a plumber, an electrician, or an HVAC tradesperson. They would all need to pass a knowledge test and work a set number of years or hours before they can be called a ‘journeyman’. The person in charge of the entire project, a ‘General Contractor’, often has little or no training at all. They often did not go through the apprenticeship program. They simply go out and try to find skilled people to do the work, and they then add a percentage to whatever this company wants to charge. It didn’t used to be this way.

Some might think - “what’s wrong with this formula? Does it really matter if the person in charge has been trained to build a home? “ Here are a few problems in my opinion.

• One problem is the cost. A 'cost plus' General Contractor typically will not have gone through an apprenticeship program to learn how to build a home or have people within their company with this training. So, to take care of your project they need to go out and find a home builder to do the work. A company like ours. They then add a percentage to whatever price I give them. So, you've just spent more money on the same work.

• The next problem is even more dangerous. This 'cost plus' company chooses who they hire because of their price, and not their ability. Finding a cheaper company would allow them to add their percentage on top and still end up at the same cost provided by our company. Because this 'cost plus' general contractor often has not been through an apprenticeship program, they cannot tell when the work has been installed incorrectly.

• Another problem with ‘cost plus’ companies is that you’re not getting an actual cost estimate for your project in the beginning. You're either getting ‘unit pricing’ or ‘square foot pricing’. This means that they look at the drawings and multiply the square footage by a number. Or they use software to provide you with ‘unit pricing’. The ‘fixed bid’ company on the other hand figures out the entire project before they begin (material, labor, and how every phase will be accomplished). They need to be accurate because they are going to sign a contract requiring them to finish at the price they provided you with in their contract. On the other hand, if the ‘cost plus’ companies numbers are wrong, they don't have to worry. They will keep billing you until the project has been completed. A ‘cost plus’ builder is not legally bound to any numbers that they originally provided. It's impossible for them to lose money based on their mistakes or poor planning, which is why the 'cost plus' formula is so popular. It allows the owner of the company to have little risk with high profits. They may say "don't worry we know who to hire to get the job done". But how would someone without training be able able to qualify another company as "the right person to hire to get the job done".

• What if the 'cost plus' company says they will give you a 'guaranteed max price'? This is the weakest guarantee on earth. They have not provided you with a detailed contract, they have only provided you with an educated guess for their price. So, if your project takes 8 months, probably during 6 of those months you will be receiving change orders for things they claim were unknown or not picked out by the customer. The 'cost plus' company may have provided you with a price that was 20 percent less than ours and based on that they get hired. But by month 5 or 6 their cost will be at our 'fixed bid' price. And by the time they finish the project they will have blown past our original 'fixed bid' price. You may get mad at them around month 5 or 6 and tell them you will fire them. But hiring another company will typically cost more, since we will often have to back up and finish things that should have been completed in month 5 or 6. Change orders are what make a guaranteed max price the weakest guarantee on earth. They will always find a way to change order you to pay for something they should have figured out in the very beginning.

• If this ‘cost plus’ company doesn't have another job to go to after your project, they may work inefficiently. They can’t lose money since a ‘cost plus’ bid allows them to simply bill every two weeks until either the project is finished, or you fire them. Again, they are not contractually obligated to finish at the number they may have provided you with at the beginning of the project. The ‘fixed bid’ company on the other hand needs to finish your project on time and not drag it out. If it takes longer, the ‘fixed bid’ company will lose their own money, not yours.

• Some people might say, “but if the ‘fixed bid’ builder feels they are losing money, what prevents this company from cutting corners?” This is a great question, and a reason it’s typically wise to get referrals for the person you want to hire. If you're talking to our company, most likely we were referred to you by either your architect or one of your friends. That means they already know that we do not cut corners. In fact, we often improve things outside of our scope along the way. We’ve worked hard to maintain our reputation. Since a ‘fixed bid’ company has the skill to figure out your entire project in advance, most likely the materials and equipment that will be used are detailed within the bid. So, it’s easy for you to see if you're getting what you paid for. The very fact that they've listed the materials & model numbers shows you that they care about what they use. No doubt they’ve selected these products based on their experience with them, or due to modern ‘building science’. Since a fixed bid company typically has the skill to do the work, they will pass all inspections. This will prove to you that they did not cut corners.

• The next issue with 'cost plus' deals with you going into a project while not knowing what the final cost will be. At one point in your life, you bought this home. You sat down and counted the cost. You figured out the mortgage payment, the interest rates, and you got a loan for an exact amount. There are few things in life that will cost you as much money as the purchase of your home. So, you were careful. Perhaps one home you desired turned out to be too expensive and would add a burden to your family. So, you selected another home which would take care of your needs. It is the same scenario with the work you want to do on your property. Why would you start a project at this price point without knowing the actual cost? Why go down that path and add additional strain to your life? Why not get 3 'fixed bids' from 3 companies for the items you want and have all of the details right in front of you. If the price is too high, then you can start removing the non-essentials from the 'fixed bid'. When the project is finished you got exactly what you wanted for the price you picked.

• This is a serious issue with ‘cost plus’. No one has a contract with a name signed next to a number. Not the General Contractor, and not the sub-contractors. So, the actual cost you'll be paying will be established at the time the service is needed. At this time, the sub-contractor knows that the ‘cost plus’ builder needs him and will charge accordingly. This bid is typically high, and the ‘cost plus’ company will then add a fee on top. So, you do not know in the beginning what the final cost truly is. We wouldn’t buy a car this way, why do we do it with our homes? Especially since our home costs so much more than our car.

I hope this helps you understand these two types of contracts and the value of a ‘fixed bid’ builder. We desire to put the skilled craftsperson back in the driver seat when referring to residential construction. We want people to live in a home they are proud of. We want the craft of building a home to be more than an office with a calculator and an email address. Hopefully, this will help you understand the terms used in residential construction and enable you to truly count the cost before you begin.