Jun20

Types of Construction Contracts

There are a two main Types of Construction Contracts that are used in residential construction.

Fixed Price.
Cost Plus.

Fixed Price

Fixed Price (Lump Sum) types of construction contracts work very well for production type new construction homes where you select from a model home that the builder has built many times. After building a home plan a builder usually value engineers each home and takes supervisors and sub-contractors suggestions to save time and money the next time they build that model. For example, the first time I built a particular model of home I found that if I moved the front entry wall in 6″ to support a truss bearing point vs. expensive hand framing, engineering, materials and time to support that truss on the first home, I ended up saving $1,100 each time I built that model. And that savings can be passed on to the homeowner as incentive when comparing prices. One thing to think about when choosing a Fixed Price contract is making sure that everything that you want is in the contract and model you are choosing, after the fact types of changes are usually fairly pricey. If you are building a custom home and using a Fixed Price type of contract, the contractor is taking a much larger risk. This risk will translate into a higher price to build that home. If your trying to compare prices on a custom home (bid shopping) between contractors make sure your specifications sheets and plans are exceptionally thorough. This is putting the contractors in a position where they want to build your home but do not want to go broke doing it. The only thing to do if you want a cheaper price is to cut the quality of items in the home. One thing that residential contractors have taken from the commercial contractors is bidding “AS PER PRINT“. This means that even though you have a fixed price contract if you supplied the plan then you are liable for any changes or corrections needed to complete the project. In the commercial world it is common place for companies to bid at or below cost just to get the contract signed, knowing that there are a number of change orders that they have identified to make up for the overhead and profit they lost while bidding. To sum up, in my opinion, most of the time, a Fixed Price contract works well with production homes and not so well with custom homes.

Cost Plus

Cost Plus (Time and Materials), there are two types of Cost Plus contracts Cost Plus a Percentage and Cost Plus a Fixed Fee. First of all, Cost Plus or Time and Material contracts are just that, any costs or materials needed to complete the project plus whichever method (fixed fee or percentage) will be the cost to the owner. This is the best method in my opinion for large custom homes for both the owner and the contractor. The owner is only paying for exactly what it takes to build the home exactly the way they want it for the exact cost plus the contractors fee. With a large custom home there are usually some complications somewhere that might end up costing the contractor and if he is taking no risk in paying for it out of his pocket, then he can negotiate a much lower overhead and profit margin that the Fixed Price contract. The difference in a Cost Plus a Percentage and a Cost Plus a Fixed Fee is that with the percentage sometimes costs tend to run out of control so the contractor can make more. With a Cost Plus a Fixed Fee contract the owner and contractor agree on a fixed amount of contractor compensation up front, which is sometimes referred to as a Negotiated Fee. A Cost Plus a Fixed Fee contract for large custom homes is ideal for both the owner and contractor. The owner can change as much or as many things they want in the home with no added contractors costs for managing the construction. The contractor is also involved in the project from the very beginning where he can value engineer the home to try to minimize any design issues or bring them to the owners or architects attention before the final drawings are complete, this can be a tremendous savings on a project.

Both of these homes were built using a Cost Plus a Fixed Fee Types of Construction Contracts.

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one of many quick blogs to come

Mike

In Cinnamon Beach Resort.

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