Just prepare yourself for it to cost WAY more than you planned!

Word.

Don't do allowances. Specify everything, then your fixed price contract can be pretty accurate.

We did a hybrid. Came in within 3% of the contracted amount.

P.s. Foundation is a variable. How much fill or excavation may not be known until the shovel scrapes the ground. This was our biggest variance and was part of the cost plus portion of the contract.

We also had an issue with the original topographic survey. It was off, and required some field corrections in the foundation and framing which lead, down the line, to some extra charges for more stairs, concrete and cable railing out back.

We specified our allowances (picked everything out beforehand, so we knew we were in a working range at least) and used those numbers in the contract for allowances. Our builder had all his guys bid out foundation/framing/trim/cabinets/etc from plans. He's been doing this 15 odd years, so he's good a good grasp of his numbers. No "suprises" came along for anyone, just the normal scheduling hiccups...like the cement plant running out of cement. Really. Set us back a week considering weather!

Very valuable pointers, JDS. I took notes! Shared savings for any amount below the GMP is ingenious but not something I've heard of before....do you know how common that is for residential builds (I'm wondering if our local builders will have ever heard of setting up a contract like that.)

Renee, running out of concrete?? Wow, wouldn't have seen that one coming!

The only reason to not use a GMP with a Cost Plus Fee contract is if your construction documents are not complete and you don't want to wait until they are. If you can't decide on the tile now, instead of listing the tile as an Allowance, put a tile unit cost in the contract or agree to provide it yourself. All labor should be in the contract price.

It doesn't matter how often any of these contract options are used; you need to discover what the contractors you like have used. Even a plain Cost-Plus-Fee contract requires a certain level of project management expertise from both the contractor and the owner (or architect) so you don't want to force a contractor to use a type he has never used before. I would be surprised if any of the local contractors have actually used a Cost Plus Fee contract the way it was originally intended to be used.

So, interview some contractors and see how they manage their projects and how they derive their fee. The fee is very important.

Here is a description of the advantages of a GMP contract.

Here is a concise description of construction contracts.

I like that GMP and the shared savings idea.

A word of caution on providing materials yourself to the builder:

IFF you are also doing a (bank-labeled 'self-build') mortgage where the bank uses the 'cost to complete' method to release funds to the builder, make sure you have CASH to make those purchases.

If you don't have cash onhand (or those items prebought before you enter into a mortgage agreeement with the bank), you could end up in a tight spot where the bank won't give you the money to buy anything.

Our bank and lawyer warned us of this.

Most contracts are worded that you must give any/all money the bank releases to the builder FIRST. This is cumulative over all invoices/releases, so if you spend bank-mortgage money early, and then come up short on the invoice, you still have to find cash from "somewhere" (not your mortgage!) to pay the builder.

One alternative to consider is a fixed management fee vs. a fee that's a percentage of the total construction cost. That way the builder isn't rewarded for running up the cost; indeed his margin is reduced if construction cost exceeds the budgeted amount.

The idea of splitting savings if the construction cost comes in less than the budget is good in theory, but it can create problems, too. One is that the construction cost can be overestimated from the outset. Another is that the builder can use lower quality materials and trade labor to produce a savings that effectively rewards him for producing lower quality.

with Fixed they have incentive to cut cost, but all savings goes to them plus they likely priced it at a higher % over cost estimate than is likely to begin with to 'guarantee' cost.

For a custom home, what is a good cost plus % to build into a contract like this?

Charles Ross, the more I think about it, the more I think cost plus a fixed fee to the builder would be fair (neither side bears unnecessary risk), and I would think builders appreciate a completely predictable profit. It still doesn't provide any incentive for the builder to negotiate with subs/suppliers on our behalf, but at least it doesn't reward him for *not* negotiating the way a cost-plus model would (on a custom home that won't be precisely specified before building, I can't figure a good way to do that except build in the "shared-savings" clause on a GMP, but that carries it's own set of problems....my hope is that by choosing a builder according to a reputation of integrity, he will advocate for us on his own)!

Jpniner, the % in a cost-plus contract is very dependent on the region. Here (Idaho Falls), the standard is 10% (although I've found builders willing to do 8% on very large homes, and up to 12% in cases where they think the house or clients will be a pain to work with!)

I recently took a Frank Betz plan and had 3 builders quote it on a lot I own. All 3 had built in this neighborhood. The quotes came in for Fixed Price at $390, $430 and $485k. Since then I've been told I need to go a cost plus route which I do want transparency cost and chance to save and cut cost along way.

@kawerkamp I should clarify that in lieu of bidding everything around we use the same trade partners (the term "sub" devalues the contribution the trades make to a project's outcome) on each of our projects whether fixed contract price or management-fee basis (we don't do cost-plus-a percentage.)

By partnering with the same trade partners on each project both we and our clients get a predictable level of quality, schedule, and pricing (we don't write blank checks--we do, however, get favorable pricing from trade partners in exchange for getting all our work.) Our trade partners know what our expectations are and that they'll be paid promptly upon completion. The time saved via this approach enables greater focus on coordinating the various office and field tasks required to construct a home to the standards that we are known for in our local market.

I think that makes a lot of sense, Charles Ross. I'm curious--every once in a while, do you put something out to bid just to make sure your trade partners are remaining competitive in their pricing with you (i.e., that they don't upcharge you because they know they've already got the job with you)?

We audit trade partner quality and productivity on each job site daily. We audit pricing periodically to ensure good value for money. Most trade partners provide unit costs that they lock in for a year, for example $x/cu. yd. to place concrete driveways and sidewalks so we would not check pricing more frequently than that.