An excerpt from PDRdesigns owner Paul Rugarber’s forthcoming book, Architecture to Construction and Everything in Between!
“Education is reading the fine print. Experience is what you get if you don’t!”
– Pete Seeger
Many people hear the word “contract” and have one of two responses: Either their eyes glaze over in boredom, or they immediately want to refer you to their attorney. I’m here to reassure you that contracts are not as dull or as scary as they might seem at first glance. By demystifying some of the legal jargon and industry terminology, I hope to show you how important it is to understand what goes into a construction contract and why you should read all of the fine print. Without further ado – let’s dive in!
There are two basic types of construction contracts that are commonly used. One is called a fixed-price contract, and the other is referred to as cost-plus. In today’s newsletter, we’ll be exploring the pros and cons of each to better inform you as to which would work best for your specific project. Keep in mind that some builders prefer one method over the other, so make sure you discuss this with them in advance and listen to their reasoning for their preference.
Fixed-price contracts mean that the builder is giving a guaranteed price for the complete project. Variable items, called allowances, will be built into the contract for any items that are not selected prior to the beginning of the project. These variables are typically for tile, cabinetry, countertops, front doors, flooring, and/or plumbing fixtures. The builder sets up these allowances for the various selections you will be making, so if you spend more than the allowance amounts, you must pay the difference. If you spend less, you get a credit back – and if you shop it just right, then the original contract price is the final price that you pay.
The advantage to the fixed-price contract is that the contractor takes the risk of cost overruns and incorrect estimating. Customers completely control the final cost of the house as long as the allowances are realistic, and as long as they stay within those price ranges. The disadvantage to this type of contract is that the builders’ costs are not always transparent. Their motivation is to spend as little as possible to complete the project, which – depending on the integrity of the builder – may present a temptation to choose the cheapest alternative materials when project specifications are unclear. In short, the fixed-cost contract is ideal for clients working with a very specific budget. The greatest challenge when evaluating contractor bids is to see that the allowances are similar. Be sure to take a close look at quantity figured and costs given, as these can vary greatly.
The other type of construction contract is the cost-plus contract, which means all of the actual construction costs are charged to you and then an agreed-upon percentage is added for overhead and profit for the builder.
The advantage to this type of contract is there is complete transparency of all construction costs and builder fees. Decisions regarding materials and costs can be made using a team approach, which reduces the cost of changes and saves the contractor time in writing up multiple change orders and figuring costs. This creates more flexibility during the construction process and less temptation for contractors to cut corners. The disadvantage to this type of contract is that you, the client, take on the risk of cost overruns or incorrect estimating. If the contractor has underbid the project in the beginning, then it is you who will end up paying extra rather than the builder. In order for this type of contract to work, there has to be a great deal of trust between you and the contractor. This setup typically works best for more complex projects, loosely defined scopes of work, and clients who would like more flexibility to make selections later in the process.
Always remember that neither of these contract formats can act as substitute for a qualified builder with a high level of integrity; they can be manipulated by an unscrupulous or incompetent builder. The best approach is always to work with someone who has a good longstanding reputation for building projects similar to the scope of yours, on budget and on time. Personality fit is a key item as well, since you will be spending a lot of time with them throughout the process!
Go out and find your dream builder. Together you can build that project that you have always wanted to complete.
Want to see some builders we recommend? We have interviewed a few just for you –click here to view them! Call us for additional input and we would be happy to assist you.