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Cost Plus a Percentage Vs Cost Plus a Flat Fee Vs Fixed Cost

Posted on: February 5, 2014

As you are looking for a home builder to bring your dream home to fruition, you will come across three different ways that a builder might charge for his services.  This post goes over the three most common methods of pricing a custom home and the pros and cons of each method.  Every project is different and has special needs that we can’t possibly cover individually in this post, so please email me with any other questions at: lee@fowlerhomesrestoration.com

Cost Plus a Percentage

Of the three most common methods to pricing a home, we believe that “Cost Plus a Percentage” is the least advantageous method for both the homeowner and the contractor.  However, these are some of the reasons that a homeowner might decide to go with this method:

  • Emergency Job where it’s not practical to craft a detailed estimate
  • Lots of unknown costs that the builder can not accurately calculate
  • Allows work to proceed without detailed plans

In a “Cost Plus a Percentage” arrangement, the homeowner agrees to pay the builder the cost of construction plus a percentage of that cost.  It’s very important in this setup to know exactly what is considered a cost.  Some contractors include the cost of insurance and personal employees’ wages as part of cost, but all of that is negotiable.  Make sure you agree on all cost to be paid by the homeowner as part of the “Cost Plus” arrangement.  Unless you absolutely must rush your project and have no time to at least come up with a “Cost Plus a Flat Fee” arrangement, you should be aware of the drawbacks to the “Plus a Percentage” arrangement with contractors:

  • No Incentive to meet deadlines
  • No incentive to control cost
  • Incentive to increase budget as much as possible

In a “Cost Plus a Percentage” arrangement contractors are not motivated to be efficient, because they are paid more for every dollar they are able to spend.  If a contractor happens to take his time and your project runs over its budget by $30,000.00, then that is more money for the builder.

Cost Plus a Flat Fee

In the interest of full disclosure, this is our preferred method of pricing a home.  Cost plus a flat fee allows for greater flexibility in customizing your home and simultaneously encourages the contractor to be as efficient as possible, so as to minimize overhead and increase profit.  However, cost plus a flat fee isn’t without its drawbacks:

  • Cost overruns are the responsibility of the homeowner
  • Final cost is not always  known at the start of the project

Any cost overruns experienced during construction – because of unknown issues – are the responsibility of the homeowner.  Also, the final cost without changes is not exactly known before starting, because there are unknown items.  However, the advantage of “Cost Plus a Flat Fee” is the contractor doesn’t have to pad his cost to cover against unknown cost.  It’s important that the homeowner knows what is included as a cost when entering into this agreement, such as, who covers supervisors, insurance cost, and equipment owned by the builder.  Just as with Cost Plus a Percentage, the items covered as a cost are negotiable.

Fixed Cost

Fixed Cost estimating of a new house is often the most understandable method for homeowners.  The complete cost of construction and the builder’s fee is determined as an exact amount before construction begins.  While this method sounds attractive – because you’re aware of your cost before the project begins – there are some cons to consider:

  • Inflated cost to cover unexpected items
  • Little flexibility when it comes to customization as the project begins
  • Incentive for contractor to use cheapest products available

Because the builder can’t possibly anticipate every single cost going into a custom home project, the tendency is to pad estimates to ensure that everything is covered.  While the homeowner is given a price that won’t change unless changes are made, this method is not conducive to receiving the best price.  Also, as Fixed Cost arrangement means everything is determined before construction begins, each individual change needs to be renegotiated with a new price.  Make sure you get not only a detailed scope but also a list of materials being used.  With that said, there are also advantages to Fixed Cost.

  • Knowing your exact cost before you build
  • Helps stay within a tight budget

If you want to know the exact dollar amount before you start to build your new home then this is the best arrangement for you.  While Cost Plus can give you a very close estimate, Fixed Cost lets you know what you need before you start.  If you have a problem with going over your budgets, Fixed Cost allows the builder to stick to a detailed scope and doesn’t allow you overspend.

At Fowler Homes we realize that every homeowner has different needs.  We personally believe that the Cost Plus a Flat Fee model is the best arrangement for both the homeowner and the builder, but we also work with homeowners that are interested in Fixed Cost estimates. If you have more questions about pricing methods or have specific questions that aren’t covered here please give me a call at 770-744-5992 or email me at: lee@fowlerhomesrestoration.com

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