Renovation Coach: Fixed Price or Cost Plus?

By Jesse Morado

For those preparing to pursue a reasonably large renovation project, you may be asking yourself which pricing structure makes the most sense for today’s economic environment?
Most buyers feel more comfortable seeing a price tag with a price stamped on it versus no tag at all. When you see the price you feel confident in making the purchase as there are no surprises. This explains why most homeowners prefer to receive a fixed price for their remodeling projects.
It is nice knowing when your contract states $50,000 that’s what you will spend.  But today, where people are into saving more money, a cost plus approach may be the more cost effective pricing approach for that next project.  So you say what’s the difference?
When a contractor sells a project at a fixed price it means the cost of your project will not escalate/increase unless one or two things occur :

• You elect to modify or amend the scope of work as agreed in your fixed price agreement by adding something or taking something away or,

• The contractor encounters an unforeseeable event (something the contractor could not have seen or anticipated without conducting an invasive assessment) i.e. opening up a wall discovering structural damage due to termites.

The contractor under a fixed price agreement absorbs any issues with estimating errors, field errors made by employees, or costs overruns due to management errors with subs or suppliers. To hedge the risk, a fixed price contract is typically sold with a higher markup. It is only fair that the contractor who is taking on all the risk that he or she take steps to protect their profit margin.
With a cost plus approach, the contractor sells you the materials, subcontractor labor, and employee labor (burdened for insurance and taxes) at the cost he or she actually pays with a fee (usually as a percentage) tacked on to cover overhead and profit.  This pricing model is typically used with projects that are complex, large in scale and high priced.Today contractors who are beating the bushes for work may find that selling at cost plus can produce an attractive selling price. With cost plus the contractor can reduce the fee, forsaking profit, and add only a fee that covers overhead.
The homeowner must understand that under a cost plus agreement they can incur costs for estimating errors, cost overruns in labor, or where there is inability to secure a sub or product for the price placed in the estimate.
As with every good deal one must be careful when dealing with some contractors who sell jobs with cost plus pricing. Some of these contractors lack experience and don’t price from formal estimating systems and simply use cost plus as a way to generate a quick low price proposal for the homeowner.
They figure, “why go through all the work of generating a detailed price when we can simply bill the customer for materials and labor as we incur these costs.” Cost plus works well for both parties when a reputable contractor puts his or her sharp pencil to paper producing a realistic estimate/budget for the project listing materials, subs, and company labor which can be secured and performed for the budget or less. So before you move forward with that next project engage your contractor on his or her pricing model, whether that be fixed price or cost plus, to get the best price without compromising quality and service.
Jesse Morado is CEO of Renovation Coach, Inc. a consulting firm providing pre-construction planning and guidance for homeowners and business coaching and best practices for contractors.  He is a Certified Remodeler and Certified Aging in Place Specialist and currently serves as NARI Nationals Education Committee Vice Chair.  You may reach him at (404) 729-4969 or atwww.renovationcoach.com.