In a fixed bid, the contractor takes the risk of costs being higher than expected, so he will usually bid high (I.e. Estimated costs, plus profit and overhead will be, say 20% higher than what you might expect from your own cost estimate). The benefit to the homeowner is that if the costs go over the bid amount, well, the price is fixed. In costplus contracts, the homeowner takes the risk, but also get the benefit if costs come in as low as expected. Time and materials is just that - an hourly charge for each worker's time, plus materials (which may or may not be up charged).

There is a third variation. Cost (no mark up) plus fixed general contractors fee. This way the GC knows what he will be paid up front for the job. If you make a major change not included in the initial contract over a certain amount of money, the GC will be paid an additional amount to supervise depending upon the scope of change. The GC can be paid in installments, too.

This variation removes the incentive to increase costs in the cost plus arrangement, but removes the contractors risk in a fixed bid. The one caveat is to require the contractor to present all original bills and invoices for review and payment.

This third variation is the option we used for our custom build, which blessedly is about complete. We paid our builder a monthly builder's fee, not to exceed a set amount of time. While our project has run slightly over the original timeline, he is not being paid additionally for that overrun. We have found this to be the best arrangement for us and it has worked well, especially since I'm a pro/con spreadsheet person who has shopped pretty much every aspect of this build. Our original budget was a mix of hard bids for the initial phases of the project + allowances for the decorative aspects. I have had complete control of the vendors we have used for those aspects, which has allowed us to splurge in the areas we want to splurge and save in other areas. Likewise, it has allowed our builder the certainty of income during such a long build. All trades have presented invoices to both of us throughout the process. Although we are ready to finish this project, it has been a joy and we wouldn't hesitate to build with our builder again. Not that we plan to anytime soon.... ;) The most important advantage to this option over the cost plus option is that we have a high degree of trust in the opinion of our builder. He does not make more or less money in relation to how much we spend on our allowances. In our area, many cost plus contracts stipulate that the builder makes a % on each selection. So, it would be in their interest to encourage the additional expenses for appliances/lighting/flooring/tile, etc.

Also with a fixed bid contract every change order leads to a new round of negotiations which gives the contractor the opportunity to make up any overruns on the fixed price portion. Change orders will arise because the job scope changes during the course of construction. No design is perfect and there are always unexpected changes. Here are some examples: If you decide you want to add a larger window than planned you'd be dealing with a change order. The contract would likely include language making it clear that you would be responsible for unexpected costs to bring the house into code compliance even if it is fixed price. There might also be changes you can't control such as weather. For example if you can find a contractor who would do a fixed price bid he might include in the contract that no more than 3 days of weather delay are included. Once more than 3 days are lost due to weather you'd have to re-negotiate (or pay more at a pre-negotiated rate). These are just some examples. Fixed bid contracts do not transfer all risk to the contractor because there will be a long list of exclusions/conditions.

homechef59 and twobelles, those options sound really interesting! Do you have examples of contracts you'd be willing to share with me?

why don't you PM me?

I've been going over the contractor's proposal this evening. In addition to the direct construction costs, he has the following items:

• Project Superintendent: $15,000
• Project Manager: $5,000
• Liability Insurance (1.5%)
• Overhead Expense (10%)
• Builder's Fee (9%)

Do these categories and amounts seem reasonable?

Liability insurance was an eye opener for me. It's based on the amount of money involved. It's a fixed cost. Your builder just passes it along to you. It adds up and is necessary. You will also need insurance on any building products that are on site. People like to steal stuff.

I don't have a copy of our old contract. The terms were very simple. Because my builder was in business for himself and hands on, Project Superintendent, Project Manager and Builder's Fee were all one fee and came to a single amount.

I will remind you that this is at least a six month project if you are lucky with weather, everything falls into place and you don't encounter unexpected delays. Your builder can only supervise a limited number of projects at a time. Make sure he isn't over scheduled, there is a written schedule plan, and require him to be onsite just about everyday. There should be something planned on every day. There will be gaps, but they should be minimal. It's important that someone in charge be on site frequently to check the progress of the work. I hope this helps.

I agree with homechef, the liability insurance is a flow through cost. In terms of whether these are reasonable amounts, it depends on the scope of your project. For instance, is the overhead fee applicable to your bottom line? Or is it only applying to certain line items? If so, the overhead fee + the builder fee totaling 19% seems to be on the higher side for my area, which is usually about 17% for most cost-plus contracts. Also, if you are being charged a builder fee + a Project Superintendent fee + a Project Manager fee, you may want to get specificity on exactly what role each of those parties will play in the build. My builder charged a flat monthly fee which encompassed the salary for our Project Sup, his office overhead and his builder fee.

Home chef gives you some really good advice that I have to echo: the project should have lots of supervision and activity on an almost daily basis. One other thing I would add for anyone building is that you WILL go over budget. I thought I would be the *special* person who could manage the project from our end and stay completely on budget, but the scope was so huge that at some point you begin to think in terms of what is efficient. For example, we added a few things now that we originally thought we would go back and do later. We realized over time that it would cost more and be too much hassle to do later. At a minimum, triple whatever your builder has set for a contingency. There will be some things that you just cannot plan for that will crop up as the project progresses.

And while I'm doling out unsolicited advice ;) I'll add this: building a custom home, or doing an extensive remodel as you've planned, is a labor of love. While you will undoubtedly have to compromise on some things, choose a few key details that you have in your vision and don't let anyone talk you out of them. These projects are custom for a reason. And above all, even on the frustrating days, remember what a blessing the space will be for your family and enjoy the process! :)

I'm in the Bay Area too - seems a bit steep, but I also suspect you are doing a much larger scale remodel than we did so may be completely standard/appropriate. Last summer we did a gut kitchen remodel with only a small amount of structural work (taking down a wall, converting a double window to a french door). I believe we paid 15% total for overhead and profit - could have been 20% though. There were no extra fees, and I was not charged separately for liability insurance (I assume that came out of overhead). Our other bid was 5% less on overhead and profit, and the third couldn't take the job so we never got a full estimate. Estimate with the third guy was ballpark just a little higher, and it sounded like there would have been some fixed fee as well - to be fair I think that the project would have been more attentively managed with this guy! There is definitely a component of you often get what you pay for here, although I'm a bit confused as to the difference between a superintendent and a manager, and what the GC is actually doing. Did you get bids from other GC's for comparison?

Great feedback, thanks everyone! It sounds like I might be able to negotiate a little bit on the overhead and builder's fee amounts.

I think the biggest value to my family, since we will be living in the house during this whole process, would be to get some sort of pay-for-performance/schedule trade-off. Which will make me feel better too. I expect that after about 6 weeks of living in half a house without a real kitchen, I will be thrilled to pay a bit extra to have the project finish on time. And conversely, if it runs over, it will make me feel a little bit better if I at least saved a few bucks in the process.

And yes, we did get two other bids. They were roughly equivalent to this one, but we liked this builder the best and he seems willing to be cost-conscious. We are, BTW, doing major structural work on half the house. We're adding on a tiny bit of square footage, vaulting the ceiling, and adding a 1/2 bath and laundry room as well as doing a completely new kitchen. So it's a big project.

Haha - I'd be surprised if they are willing to negotiate in this market, but certainly can't hurt to ask! Sounds like it will be lovely when you are done at any rate - I've always wanted a vaulted kitchen ceiling, but that just wasn't in the cards...