Cost Plus Home Building

[Joe]

I'm looking into building a home on our 35 acres in southern Colorado. I've found a builder/general contractor that I like. He does his work on a cost plus basis. He basically charges a 15% margin on all materials and labor as his contractor fee. He has crews that do the finish carpentry and painting and he subcontracts everything else. He has indicated that I can do some of the work myself if we can agree on items that won't hold up the progress or delay any crews. That's ok with me since I'm not experienced and will essentially be a laborer on the job. What things should I watch out for in signing a cost plus contract? Is 15% margin reasonable? What requirements should I place on him, such as insurance, being bonded?? What is customary as a holdback payment to finish punch-list items at the end of the project? Any advice or experiences are welcomed!

[TimSullivan]

If you talk to previous customers of this builder, then you will know what to do. Cost plus is a guarantee for the builder and nothing for you.

I just finished a home and used a new builder who wanted to do the job cost plus. We agreed on a fixed price and he did a wonderful job building the house. He then built my barn on a cost plus agreement. I knew by then that I could trust him. When I was going to start the deck on the new house, I fell and broke two ribs. I asked him to put the deck on and send me the bill. A good job at a fair price and that is all you can ask.

Just remember that you have no way of really checking up on the cost of the supplies or if they actually reach your job. You have to be able to trust a cost plus builder with your blank check. There is a cost plus builder in our area that has a barn full of lumber and other building supplies. Can you guess where they came from?

[ChuckinVA]

Get a firm price from the builder first. Then offer cost plus not to exceed and split the difference between the quoted price and the price he brings it in at. He will have incentive to watch costs and manage the job. If he is not interested either he has plenty of work at his price or you don't want him building your home. I have done this twice and both times it has worked well.

[kevinro]

(I had posted this on TBN, but apparently we are moving over here)

I just finished building a new house, and it was cost + 10%. I highly recommend doing it this way on two conditions:

1) The builder has done a cost + job before
2) You can check with prior clients who have done it this way.

Having a house built is not like buying a car or a tractor where you are looking to get the best price! You need to strike a balance between your needs to get value for the dollar and the need for your contractor to make a profit. Having your contractor not make money or lose money is the exact wrong thing for you to plan on. That is a nightmare for everyone involved, especially you.

Get an estimate up front from the builder on the total cost, and put that in the contract that the expected price will be X. That protects you a little bit from the builder running amok.

The problem with having a fixed bid on your home is that it is nearly impossible to completely spec out the contents of your house ahead of time. You WILL change your mind on several things before the end of the job. With a fixed bid, you normally get nailed on the change orders. It is this point where your contractor will have to try to make up any extra expenses he didn't account for in his bid. At a minimum, change orders are a pain in the butt.

Also, consider the fact that the builder, if he is smart, has added a 10% buffer to the bid to handle contingencies. If everything goes well, you just paid an extra 10% to the builder for no reason. If it wasn't enough, then it will either show up in a change order, or you are going to have shortcuts on the building, or a dispute at the end. Disputes are no fun at all.

The bottom line to building a house: If you don't trust your contractor to do it on a cost plus basis, you have hired the wrong contractor. Find one that you feel comfortable with. This is a team effort that is going to take time. You want someone you can work with and trust with your wallet.

Something to watch for is the billing rate for labor. You need to agree, BEFORE YOU START, what the billing rates for employees are going to be. $25.00/hr for a $12.00/hr laborer is not fair to you! That $12.00/hr laborer should cost you somewhere in the $15.00/hr range after paying labor and industries and other taxes.

I don't know about your area, but 10%-12% is a fairly standard rate in the northwest. Mine was done for 10%. It was a rather expensive house, so the builder did quite well. If your house isn't expensive, then the rate may be a little higher.

Kevin

[EJB]

While a good GC will undoubtly have better access to subs then you would, I can't imagine he is really able to add much value to buying a truckload of lumber...

If you think about it that way then 15% seems kind of high, because since most major projects are usually about a 50/50 split between labor and materials, since you would have the ability to procure the materials at essentially the same cost as your G.C., he is really getting closer to 30% markup on the labor (and zero on the materials).

See if you can get him to accept a markup on the labor only [img]/forums/images/icons/confused.gif[/img]

Good luck. [img]/forums/images/icons/smile.gif[/img]

[bigbukhntr]

we just finished our house, and i was considering a "cost plus" builder, where he gave me a pretty firm price for any certain trade, and if he came in under that, we "split the difference", he gets half and i get half....well....

what i found out was that he was trying to charge me, say $15,000 for the framing labor....he automatically got 15% of this per his contract, and he also knew the sub was only gonna charge me 12,000 to frame the house....so he got 15% of 15K and half of the $3000 he "saved" me....i told him i thought he was double dipping and to not show up on my property again...

[Pat]

Joe, I'm sorry to chime in late. Is it better late than never or better never than late? Anyway, I have somewhat extensive contracting experience (not residential construction) on the customer side. I think my experience is essentially transferable to residential cost plus or firm fixed price. With an honest contractor, the key issue in cost plus is RISK. In cost plus ALL the risk is on the customer side. There is no monetary incentive on the part of the contractor to control costs since every dollar of your money he can spend in any manner for expensive materials or rework or kickback from subs results in an additional 15% (or whatever %) extra profit for him. Even if the contractor is honest and doesn't do kickbacks and doesn't "cheat" on materials he still has no incentive to spend any time looking for good deals on supplies as that is not in his vested interest. His subconscious as well as conscious motivation does not work to your benefit, cost wise. There are honest contractors who will do a good job, just keep in mind the playing field is tilted.

On the other hand with firm fixed price the risk, in theory, is all on the contractor side. In the face of any uncertainty the contractor must bid high, just in case. Market forces such as competition, if there is sufficient competition, help keep the "over allow" to a minimum but it is still there. If your residential project is simple enough so the contractor has a good feeling about controlling his costs, he should feel comfortable giving a firm fixed, not to exceed, cost with a mimimum over alow cushion. If there is anything risky, uncertain, or NEW involved there is likely going to be a considerable allowance made for "just in case." You can't blame the contractor in these instances, he doesn't want something out of his control to put him out of buisness or delete his profit for his time invested.

A previous poster gave insight into how cost plus incentives can go wrong. Since RISK is the real issue in question that perturbs the process, lets consideer how to apportion risk, to share it. One builder I know charges about a thousand dollars per week for his involvement but not to exceed 15% of the total project with the interesting twist that if the project runs long, i.e. beyond his original estimate he doesn't get that money. For the time spent beyond the estimated schedule he gets his 15% minus the grand per week. This introduces another big RISK area, schedule. Schedule risk is often sort of glazed over or forgoten by customers, at least until the project goes way beyond schedule and then customers wish thay had a set of schedule/completion clauses in the contract.

If you have the time to participate and feel that you are sufficiently knowledgeable regarding purchasing materials then you could assume that responsibility. That does two things: 1. You know for a fact what the prices are and there isn't any hanky panky with any suppliers who have an "arrangement" with a contractor. 2. often a contractor uses his exaggerated claims regarding his up front materials costs to justify his big fee. If you take that away he should be willing to negotiate with you to establish a reduced fee percentage. If their is great reluctance to let you control the materials purchasing, that should give you cause to wonder why. Why should he be distressed if you pay, unless: 1. he has an "arrangement" with one or more suppliers or 2. he exaggerated the value of his fronting the materials and is hesitant to lose the free money he was getting sort of by misrepresentation.

I think that the risks of building a house could be equitably and reasonably shared between contractor and customer. Take for example the firm fixed price contract: It is legitimate for it to be inflated to account for risk BUT not all parts of the homebuilding process are risky, i.e. so out of control that we can't get a good handle on it. Most of the subs to the general have to offer firm fixed price bids or some sort of "piece work" price schedule like 10 cents per square foot to hang drywall or $2 per foot for 1 inch sched 40 PVC water pipe 2 ft in the ground. Don't let someone try to dazzle yo with the ENORMOUS COMPLEXITY of building a house. The space shuttle was complex, most home buillding isn't, at least not when broken down into phases which are broken down into tasks that are broken down into sub tasks, etc. At some point, driving a nail, or cutting a board isn't all that complex. With even a simplified WBS (work breakdown structure) you and the contractor could easily (well manageable at least) go through the collection of tasks that constitute building the house. Some of them will be pretty darned well understood and offer little or no schedule or cost risk. Others, might be less well understood or controllable and might need to have a slight pad or "extra" set asside for just in case. A third category would be reserved for only those items that just by their nature are difficult to control and or estimate with fair accuracy. These wold be allowed a larger, fairly substantial "over run". Now then, the devil is in the details. The contractor needs to comunicate with you. No surprises to be held back. On your part, you have to remain calm and not even verbally punish the contractor for telling you the truth. The contractor needs to explain, with a logical and truthful rationale, why he went over the estimated budget on items in the second or third category. If he tries to get extra moiney for category 1 items he is essentially telling you that he cant control the simplest easiest tasks and you should be looking for someone to replace him before you proceed any further and really get in a mess.

You can't control what you don't (or can't) measure. Placing various portions of the home building exercise into the three risk areas is a first level approach to controlling risk (and cost). I recently heard a horror story about a family up from Texas who contracted with a fairly well respected builder to build a $200K residence. They got the house on time for only $290K. Plain vanilla cost plus didn't work too good for them. Beware the builder who promises the world and wants to get started right away with a handshake or minimum contract or "HIS" contract. Considering the risk in this, a hundred or two to a lawyer to review the contract and propose changes to protect your interests could be the cheapest insurance you will ever buy. After a while, some contractors begin to believe they are "due" whatever they squeeze out of a deal by shady practices. Everyone does it, if I tell the coustomer the truth they will go somewhere else and get cheated worse so I am doing them a favor, etc etc. Be leery of any contractor who won't let you control the money that gets paid to suppliers. Many contractors "borrow" from one job to help another job, a few studs and joists, a few boxes of nails, a couple rolls of tarred felt, it goes back and forth and evens out in the long run, doesn't it? Maybe, maybe not. It is NOT ethical and if a lawyer did it, i.e. comingled two client's money or mixed with his own it is grounds for legal proceeding against him and could result in being disbarred.

I don't want to paint an only doom and gloom view of contractors. Many are honest reputable individuals that would never intentionally wrong you but they aren't labeled on their foreheads and it is tough to know which is which as the worst of the lot sounds like a saint.

And in closing (bet you thought I would never get here) interest rates are at a low, unprecedented for decades, so the cost of a contractor fronting materials is not as great as they may have you believe.

Let us know what really happens, as it happens. Curent experience is of great interest.

Remember what P.T Barnum said? There is a sucker born every minute (and two to take him)

Pat

[TimSullivan]

Great post Pat, thanks for taking the time to lay it all out. There are very few contractors that I would use on a cost plus agreement.

Tim

[BillG49]

bigbukhntr,

Could you send me the name and phone number of your architect - via e-mail or private message? I'm in the Dallas area, and the cost sounds very reasonable, especially if you are happy with the results.

Thanks,

[Pat]

Tim, Thanks for the kind words. It is a subject that is near and dear to my heart. I feel under great pressure to get started on my new house. Unfortunately the best builders I can find that could start this fall want COST PLUS. I haven't broken off negotiations/comunications with anyone yet but I need better control than just blind faith that I will be a happy and satisfied customer as they claim all others are. (It couldn't hurt if my architectural design software that I am using to design the house would let me print out the designs reliably instead of most of the time erroring out.)

I hope I didn't come across as too negative regarding shoddy, deceptive, and plain oughtright illegal practices that seem to run rampant these days. It is a sign of the times, I guess. Yet another symptom of a general moral decay. The whole process is made harder in my rural area as it is hard to find someone who is up to date on modern practices. It is sad but the majority of contractors (virtually all building trades)that I meet are honest hardworking chaps who are 20 years behind the times. They do what they do concientiously, but what they do is often poorly engineered by modern standards. A common complaint that I hear from contractors who have been to a fair sized city to do a job or two is something like, "man, I sure don't want no more jobs at xxxxx, those inspectors have all these rules you have to follow and everything has to be just so."

Any sufficiently advanced technology is indistinguishable from magic. Different folks have different thresholds where stuff just seems like magic. For some, slip joint pliers are pretty high tech. My rural area is a land of contrasts. Lots of good ole boys doing it the way they learned from folks who didn't know any better. It is like a Xerox copy of a copy of a copy. After a while the fine details are lost and only the general shape of things remains. You can't aford to have important pieces of reinforced concrete or whatever just look sorta like what you need. If a "concrete" guys eyes glaze over when you talk about air entrained, fiber reinforced, pre or post tensioned, slump tests and the like then you might not want him doing anything more difficult or important than a sidewalk. The devil is in the details. Two footers can look alike to the casual observer and have vastly different chances of holdinlg up over time if stressed. Little things like sharp inside corners instead of properly radiused corners are stress risers which promote cracking and on and on. There are just too many details required for a quality job to be able to just tell the good ole boy what you want and let him do it. It would be like taking a few minutes and telling a tone deaf person what they need to know to sing an opera properly. Not likely to work out satisfactorily irrespective of your patience or the tone deaf guys sincerity.

Best of luck to you in your endeavors.

Pat