Cost Plus Contract

[suzerain]

Does anyone have any experience dealing cost-plus contracts? I am looking at a home where the builder is insisting on a cost-plus contract. I have reservations considering there is absolutely no incentive for the builder to restrain costs. Does anyone know a good source to look at to make sure I do not have to deal with runaway costs or, at the very least, constrain the builder should "costs" get too high.

Is this common with custom home builders now? Should this be something I am wary of? Any help would be appreciated.

[musicman]

Does anyone have any experience dealing cost-plus contracts? I am looking at a home where the builder is insisting on a cost-plus contract. I have reservations considering there is absolutely no incentive for the builder to restrain costs. Does anyone know a good source to look at to make sure I do not have to deal with runaway costs or, at the very least, constrain the builder should "costs" get too high.

Is this common with custom home builders now? Should this be something I am wary of? Any help would be appreciated.

i think there is a fixed fee for the contractor on this type of contract. so if it takes longer than expected it doesn't cost more you fee-wise but you are responsible for any changes you want to make etc.

[gwilson]

I have a cost plus contract I use.

As a builder, I prefer it for the reason that it allows the home owner to control the cost of the home and keeps the builder honest. He can't cut corners in hopes of inflating his margins. You also know the builder isn't marking things up 25-50% which isn't uncommon. Cost-plus contracts are much better suited to home owners who either A. want to be more involved in the process (eg they see the invoices and may even sign the checks, or at least see the invoices to audit the costs, etc) or B. just want to make sure they aren't paying 50% market and know the builder and trust he isn't double dipping (taking his percentage and having the vendors/contractors mark things up and taking a kick back). I chose to do primarily cost plus after I parted ways with the last builder I contracted for because I didn't enjoy seeing the home owners getting shafted at every turn.

As a cost plus builder I can make a decent profit and ensure a happy home owner, which translates to more business for me because my home owners are my friends and loyal.

That being said, you have to restrain it. The cost he is taking his percentage off of (no more than 15%) needs to be set in stone, and any changes to that cost should be done by change order.

PM me an email address and I can forward you a copy of the default cost plus contract that I use. Feel free to ask any other questions if you need to.

[jm1fd]

Does anyone have any experience dealing cost-plus contracts? I am looking at a home where the builder is insisting on a cost-plus contract. I have reservations considering there is absolutely no incentive for the builder to restrain costs. Does anyone know a good source to look at to make sure I do not have to deal with runaway costs or, at the very least, constrain the builder should "costs" get too high.

Is this common with custom home builders now? Should this be something I am wary of? Any help would be appreciated.

See if they won't do a "cost plus not to exceed" contract. That would provide a cap on total expenditures. If costs went over the cap it should come out of the "plus" (profit).

[gwilson]

See if they won't do a "cost plus not to exceed" contract. That would provide a cap on total expenditures. If costs went over the cap it should come out of the "plus" (profit).

This is how it is SUPPOSED to be. But many builders (myself excluded) conveniently leave that part out.

[suzerain]

This is how it is SUPPOSED to be. But many builders (myself excluded) conveniently leave that part out.

So will most builders agree to the "not to exceed" provision? Is it something that is conveniently left out but, if brought up by the buyer, will usually come in? I know this sort of provision would make me much more comfortable with the whole process. I will push it with the builder and see where I get.

[gwilson]

So will most builders agree to the "not to exceed" provision? Is it something that is conveniently left out but, if brought up by the buyer, will usually come in? I know this sort of provision would make me much more comfortable with the whole process. I will push it with the builder and see where I get.

If they don't agree to it, simply don't build with them. I would never dream of leaving out such a clause on a project I build, but I decided to get out on my own BECAUSE of the lack of ethical considerations I was seeing.

If they refuse to agree, just tell them thanks for your time and move on. Also, before you bring it up, make sure they've given you a price already and confirm that they will commit to that price. The reason for this is, if they give you a soft estimate or no price at all, and then go ahead and agree to "not to exceed" clause, they can pump the price up to cover their buts and inflate their profits.

[felamy]

you have to be careful with costplus contracts as the builder will give you a purposely low price to draw you in so you will dismiss other competitors and ask you for more money in the end.

i find cost plus contracts to be very common with small custom builders less than custom builders who are more "reknowned" and "popular"

[gwilson]

you have to be careful with costplus contracts as the builder will give you a purposely low price to draw you in so you will dismiss other competitors and ask you for more money in the end.

i find cost plus contracts to be very common with small custom builders less than custom builders who are more "reknowned" and "popular"

Hence the reason the cost has to be locked in in the contract.

The more "reknowned" and "popular" builders rarely do cost plus because they are all about the margins. Why work for 15% when you can work for 25-50% is what they think.

A 2.5million dollar home to the home owner might cost them 800k to 1.2 million to build (for example, the cost could vary greatly depending on trim/amenities/etc). If they did it cost plus, they'd make significantly less money.