All contractors deserve to earn a profit and cover their overhead, just as all clients deserve 100% transparency in how their money is spent. For me, cost-plus pricing is the best way to provide both for nearly all residential and small commercial construction projects. Before I get into how it works, I’ll share how I got here.
I live and work in Newburgh, N.Y., home to the second largest historic district in the state, about an hour north of New York City. I run a small, five-person design-build company that does interior remodeling, custom cabinetry, additions, historic restoration, and retail build-outs. Like most contractors, I began my business working in the confines of fixed-price contracts. Because much of my remodeling work is in older homes that often have hidden conditions that are hard to predict, estimating can be difficult. But many clients expect the contract price provided at the beginning of a job to be its final cost, despite unforeseen issues; negotiating change orders can be dicey, as they are basically smaller fixed-priced contracts tied to specific issues.
After a few years of working with fixed-price contracts, I began to realize just how easy it is to miss things when preparing an estimate. It’s a fair assumption that most if not all builders have experienced the anguish of discovering they forgot to include something but being reluctant to ask the client for additional money. A large enough error can impose a significant financial burden on a builder, particularly one who’s in the early stages of establishing a business.
Adding to that challenge, as builders and remodelers, we work in a highly unregulated industry, with practices varying state to state, county to county, and even town to town. Some contractors even guess on pricing or give single-line prices for complex jobs. Unfortunately, contractors are often hired on price alone, and not on their attention to detail, knowledge of building code, familiarity with best practices, previous client relations, and jobsite cleanliness. Also, many clients see unrealistic costs on home remodeling TV shows and Pinterest and expect, for example, a luxury kitchen to cost $15,000. All builders of quality have heard horror stories about low-price bidders doing shoddy work and unscrupulous contractors running away with people’s savings.
A client must trust the contractor to provide a reasonable estimated cost and good-quality work, while a contractor must trust the client to pay them for services rendered. But commonly, clients are (or feel they have been) taken advantage of by an overcharging (and sometimes, underperforming) contractor. Similarly, some clients decide to not pay a contractor because they think the bill exceeds the value of the work. Neither scenario is desirable.
The question is, how do we change misconceptions about contractors, increase client transparency, and ensure that builders get paid fairly? The answer: Change how we structure our pricing contracts. This is where cost-plus comes in.Read More