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Renovation Costs: Cost Plus vs Fixed Price

June 23, 2018

Once you have finally found “the one” (the northern beaches builder who will be your better half while you unite to create your dream home), it’s time to negotiate a contract. It’s a very important decision and one which deserves your time and careful consideration. Deciding on a contract is, unfortunately, not a black-and-white process, and what might fit well for some might end up costing you more than it should. Like having your first baby, everyone will have an opinion on what you should do and how you should do it – politely smile and nod at their suggestions and don’t feel even a tiny bit bad when you do it very differently. Only you will know what is right for you!

A guide to choosing the best contract for you

First things first – the Budget

Many people cringe when talking about budgets but you should try to keep this clear with everyone involved, especially your builder. Think about whether your budget is going to be fixed or if there is room to move in order to allow for more flexibility as the works progress. Consider if you would like to have an ongoing active input in the decision process relating to what materials are to be used (allowing for a change of heart along the way) or whether you would like materials to be decided from the beginning so that you don’t have to revisit it at a later date (one less thing to procrastinate about).

It’s important that you feel confident in your builder’s ability to efficiently manage the construction process. The last thing anyone wants is to be second-guessing their builder’s decisions or spending time worried that their builder is slacking off when they’re not there; you want to know your builder! Yes, this relationship (like your marriage) will thrive on trust. If you aren’t confident that your builder is transparent, then seriously consider your contract options…or find a new builder.

Cost-plus contract

‘cost-plus contract’ basically means that the builder will give you a reasonable estimate for the job plus an additional payment to allow for a profit. This is good for those who want a bit of flexibility along the way – the luxury of adding a bit here and there and change of mind.

The Advantages

  • A builders profit margin will be less with a cost-plus contract. This is because the builder can carry on with the confidence in knowing he will be paid for all work completed without risk of losing money.
  • There are savings to be made for you using the builder’s discounts on materials. The builder’s markup on materials will be a fixed percentage allowing you to benefit from the builder’s original discount.
  • You can avoid additional paperwork and save on time relating to variations. Extra works can be quickly decided upon and then immediately implemented without cause for delay.
  • As a client, you can engage in a more active role in the building process. Participating in on-site meetings will grant you the freedom of choice when it comes to choosing materials and building methods.

The Disadvantages

  • The exact total cost of the build will not be known until the end of the job. This can make some clients feel uneasy if you are trying to work to a predetermined or strict budget.
  • A builder will need to provide you with an estimate of the cost of works to be referred to as a guide, however costs will vary along the way. Costs will be determined based on the time it takes to complete a set task and the builders ability to manage the associated materials and tradespeople.
  • You as a client are at risk of potential cost increases. This style of contract requires a higher level of trust in the builder appointed to complete the works.

Fixed price contract

fixed price contract basically means that the payment amount does not depend on resources used or time expended. A fixed contract will give you an exact costing of the total build before the works begin.

The Advantages

  • The total cost of the build will be known to you from the outset. This will allow you to set your budget and stick to it without fear of blowing out.
  • The job is less likely to drag on as the builder will be highly motivated to finish on time to maximize his profit. Yes, this means you can tell your mother in law that Christmas IS at your house this year (maybe this should be in the disadvantages section!?).

The Disadvantages

  • A builders profit margin is higher to accommodate for unforeseen variables throughout the construction process.
  • If the fixed price has not been adequately determined by the builder, the quality of work can be affected by tradesman rushing to meet unrealistic timeframes (a panicked apprentice is not a pretty sight).
  • Variations to the contract can be an expensive exercise as the cost of each variation will incur the same builder’s markup common to a fixed price contract.

Decision time

Now that you know the basics and also the advantages and disadvantages of cost-plus and fixed price, it’s time to start thinking about what contract is going to work best for you. It is a good idea to talk to your builder about their experience of both contracts and what they feel most comfortable with. Some builders are more comfortable with one type of contract and it’s good to keep this in mind when deciding what will work best for you…what is it they say “happy wife, happy life?” (replace: wife w/ builder)

One teensy bit of advice

Even for the most professional and experienced builders out there, nothing ever goes exactly to plan. Renovating is a time to practice your patience and mindfulness (yes, you did just hear renovating and mindfulness in the same sentence); glitches along the way often turn out to have the best and most surprising outcomes in the end. Remember to put things in perspective (will this matter in 5 years?) and when things don’t go exactly the way you hoped to have a laugh, have a wine (or 3) and remember that it will all be over soon!

Have you had any experience with these types of contracts? We’d love to hear from you!