Fixed cost? Cost Plus? Which contract works best?
I had a house built with a “cost plus” contract. I will never do it again. Money is not the only reason. Here are two other reasons that are subtle and deadly to your budget.
Any homeowner is interested in building the best possible house for the least amount of money. When your builder is working for you under a cost-plus contract, he is not motivated to save you money. The opposite is true. The bigger your total project cost, the bigger his compensation.
This came to me as a shock after I completed the building of our new home. I went to a Builder’s show in February 2020 and browsed books sold by the National Association of Home Builders. One of them was about contracts. So here is the quote from this book:
Cost plus contracts… are signed for one reason – the home buyer has deep pockets and is willing to pay for what he or she wants, regardless of the amount of money required.
The assumption of any builder you are signing the cost-plus contract with, is that you have more money than in the budget you were quoting. Way more.
And if you think that it was just me, a fresh immigrant who did not know what she was doping, think again. Have you ever heard the term value-engineering?
Value-engineering happens on every second project in construction – when a homeowner develops the plans with the architect, gets permit, receives the quote form a builder and says: Wait a minute, it is 20% over my initial budget. How do we get it under the budget? And then the homeowner pays again – to meet the budget, while going over budget on the “soft costs” of architectural and engineering fees.
I am passionate about building homes for families to thrive, so I have been working hard on a solution that will help people avoid the same mistake. And so far, there is only one solution: a homeowner needs to become an expert before they start a construction, not after. Or hire an expert who is working on their side and is not motivated by the project cost increase.
P.S. I bought a book, I still have it, so it was not a dream.
P.S.S. When I was planning my construction project 5 years ago, I was told by everyone around me that in my neighborhood they only use cost-plus contracts. It was a blatant lie. At the time I did not know any better. Do not make the same mistake.