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COST PLUS BUILDING SERVICES
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Cost-Plus Agreements
The one thing that no builder or contractor can do is predict the future. What we mean by this is that most major projects like a new home build or a substantial renovation can take up to a year to complete, and predicting where the project cost will be that far out is impossible. The reason no contractor/builder can predict a price that far out is that most subcontractors will not honor a quoted amount more than 30 days. There is also the issue of long range lumber commodities, US/Canada trade issues, and other market conditions that are simply not in their control. So what do most builder/contractors do if a client wants a “firm price” a year from now? They do two things; first they guess as to what they “think” future costs will come in at. Second, they need to include a “fudge factor” to allow for the “what if factor”. This way, they “hope” they are covered if costs do come in way higher and they can still make a profit, and if cost come in way lower than they guessed, oh well, they make more than they thought they would.
This is where a cost-plus agreement can have an advantage. Under a cost-plus agreement, the contractor/builder does not need to guess where construction costs will be some time way down the road, as the hard cost will be what they are when the project is done. The builder simply makes a percentage fee calculated based on the end project hard cost. This way if future market conditions stay relatively stable, the client is the winner, and if market conditions do go up during the build, the cost is most likely where the builder would have guessed under a fixed price agreement any way.
Cost-plus has other advantages, such as dealing with change orders. When dealing with a fixed price contract, the builder is working off of very strictly followed specifications and building plans. Any requested change by the client means a change order is needed, which can hold up the project. It should be noted that this is where a lot of contractors in the industry make their “real money” because you have no choice but to use this contractor for the change, and you are at their mercy for reasonable pricing. A cost-plus agreement solves this issue.
The con to cost-plus agreements is that the builder/contractor is somewhat motivated to make the job cost as much as possible because the contractors fee is based on a percentage of the job cost, the more the job cost the more the contractor makes (see also Fixed Fee Project Management).
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