Change orders should be due IMMEDIATELY, outside the disbursement schedule of the original contract. For any type contract. It’s the only way to keep everyone up to date and conscious of the adding up to be bigger than they thought total.

Fixed management fees on cost plus usually short the contractor by quite a bit. They increase his risk without increasing the compensation to manage risk. There has to be a sliding scale of compensation based on risk, and standard cost plus as a % does that nicely.

Why are you asking this question here?

Well being this is the first discussion I’ve started myself I didn’t know how or where to “place “ it.

This contract type needs to be managed by an owner's representitive which is not a common practice in home building.

We had a cost plus contract. It included a project management fee of 10% on everything. It also included a 15% fee on materials but not labour. We were invoiced every two weeks for literally every expense and got an itemized copy of every single receipt and then each receipt was tagged regarding what part of build it supported. We then had a job costing document that was constantly running and being updated. If something was an unexpected or overage it was itemized on the front of the document as a job update. We had major areas grouped together and could say estimated amounts vs actual etc. we could see all the costs over time too and know how close to completion on each area we were. We didn’t really have change orders or any fees for this type of thing as we were cost plus so always would pay the cost of whatever it was plus the agreed upon mark ups. We never changed anything other than with advance notice and working with builder though. Our design and surveys etc was not part of the contract and separate.

Hi @WestCoast Hopeful, that's great info.

I'm not familiar with a separate markup on materials in a cost-plus contract. We ended up going fixed, but all the builders I interviewed who did cost-plus did 14% on the total.

We met with several builders and some claimed to have a 15-20% project management fee alone but their estimates to build our home were much higher. We were comfortable with the mark ups we paid as the overall cost to build was still within the range we wanted it to be. We wanted to see all invoices and labour charges.

We have a fixed price contract and wish we had a different type. The price seems to be fixed on very little and we are given a change order for any subs that increase the price and we are not given many details as to where the money is going other than general categories. We also pay 19% mark-up on everything.

@Lora P that does not sound like a fixed price contract. Were there allowances in your contract for everything that has been changed?

That isn’t a good fixed price contract…

Many lenders won't accept cost plus contracts, but many clients don't have a lender.

There is more admin cost to manage a cost plus contract in billing, bidding, etc.

Cost plus can be an optimal for both parties IF all decisions are made quickly and/or in advance of project commencement, but that is rare. Delayed decisions come with brutal cost and schedule penalties you may not be able to control, especially now.

We are doing cost plus. I think we will be 30+% over the original quote due to a combination of covid cost increases, not enough in the allowance amounts and buying more expensive finishes.

One example: our plans showed a very large front door with side lites, nothing that can be bought off the shelf. Our builder put in an $8K allowance. When we got quotes the lowest was $18K. So we either changed the design or spent more. We spent more. I don't think our builder realized that some of the details in our plans were very custom and cost much more than normal sized products of med/high quality.

I'll come back when we add everything up and see where we ended up over the original numbers! The only positive is that older existing homes in our community, that need major updates, have also increased in price by crazy amounts, so we might end up with a new house for not much more, when compared to a neighbor buying a 20+ year old house that needs updates and doesn't have the same levels of coastal/hurricane construction and newer materials and technology.

I do both style of contracts with my customers, give them the option. I prefer cost plus since it's less chance for me to lose money. Fixed is easier though, but I find myself giving too many freebies on the fixed contract due to not wanting the extra paperwork.

Michael, some of the changes were in line items listed as allowances but some were not. At the last minute he changed windows to an allowance because we changed windows color to a less expensive one and couldn't get an updated price from the company. We naively thought this was a good thing. Ha. Then the change order came in for 8K more after windows were installed. He wouldn't send me the paperwork but said it was for window installation cost increase. The only thing he hasn't come back with change orders for are his own work (he's the builder) where the material costs increased. I do not feel bad because he's made 19% mark up on 100K of change orders plus 19% on 6 months and hundreds of thousands of dollars of land work (had to install fire hydrant and fire truck turn around and run utilities a long way) overseen by the engineering company. We went into this too naive about the GC's role and did not ask for what was included in each line item. For example, tile work was not an allowance though tile itself was. We chose inexpensive porcelain that was half the cost of the allowance but got a $5k change order for tile with as the scope got bigger but there was no scope listed in our contract except for total square feet which we stayed under. He refuses to give an itemized list of why cost increased. It is beyond frustrating and unless it is typically done differently and you understand what has to be done and can get an itemized list of what is included in the fixed price, I do not recommend this type of contract.

I'm very interested in this conversation. We're starting to interview builders for a custom home, and I was surprised that the smaller builders near us all seem to work on cost-plus (15-20%). A slightly larger builder told me either type of contract was fine but for a full home project they usually do fixed price. The architect recommends against cost-plus and said that 15% sounds fair but 20% is too high. He said on his projects, builders almost always use fixed price, and that's what we were expecting to encounter. Also, it's my understanding that there should be as few allowances as possible, for the reasons people are describing--they're almost always too low or noninclusive. The architect who will be helping us evaluate the contracts will i'm sure know more than we will about what needs to be described and included.

The tile example above seems egregious to me--even if there's an allowance for the material because it hasn't been selected before the contract is written, the installation should be included. Now if there's an unusual installation required b/c of the material, eg, someone wants to do a marble slab in the shower instead of marble tiles, i can understand an additional charge.

2Rickies, it sounds like you are starting the process more informed with an architect whom is more involved in the GC bid process than ours was, so a fixed price contract might work for you. I would just make sure everything included in the fixed price contract is spelled out so you can change it if anything is not to your liking.

The challenge with fixed is when allowances are not sufficient or you want to make small changes. The allowance overages and change order penalties kill you. Both *will* happen.

Actually, you should count on blowing your budget by 20-30% for any custom build, on average.

RE: WestCoast's bills comment, we saw all bills which had an allowance attached (basically everything except foundation, framing, drywall, paint; not joking).

I'm in a very hot market area and 3 yrs ago the going rate for cost-plus was 14%. I would go cost-plus for sure if I built again, and I would only go with a builder who had a modern invoicing scheme.

westcoast, that way of approaching allowances is confusing to me. Tbh it doesn't seem ethical to charge that much for a less $$ item. Shouldn't there be a reconciliation if the item is far less $$ than the allowance? Some items may go over but others may come in under the predicted cost. Or, like what i did for a recent reno, I supplied some of the materials (eg, door hardware), and then only the installation price was in the contract.

I like the part of cost-plus about seeing the bills. The problem is that even if there are line items for every material and install, there is no limit on management time/labor so it seems like you could be paying 15-20% on a very mysterious total. The homeowner assumes all the risk, whereas with fixed, the price should be the price--even if say, windows increase in price, you pay what's been agreed to.

In a fixed price contract there wouldn’t be allowances? Everything is what the builder says it costs. So it could cost less but you are paying regardless.

I supposed in cost plus yes labour could be anything and unpredictable but sub contractors have their own billing so can’t pad them bill so to speak. I guess they could pad the bill of the random clean up guy but the builder doesn’t bill a ton of labour themselves. Their subs provide estimates and then bills for their own labour.

I guess to my mind allowances should be reserved only for a few line items where the builder is concerned about volatile prices, or something the owner just won't be deciding until late in the day (like backsplash tile), vs some builders who take all the discretionary decisions and make them allowances, which is bad. Then it's no longer a fixed price. I know that in a fixed contract the builder is likely to inflate the bid in order to cover uncertainty, but at least then I'd have a solid number to work from. If we had a cost-plus plan with a guaranteed maximum price, which if we stay under, then we split the difference with the builder, I would be amenable to that.

The current building clinate and materials shortages has create a climate where contracts that are ”fixed price” have so many issues with supplies that they’ve turned into virtually cost plus, but with much less of the transparency of cost plus. Might as well ho straight to vist plus. With a 12% overhead and a 15% profit line. Because no builder is gonna build for less than around 25-30% total charges these days. And they’ve learned to call out overhead and gross profit margin separately, to make the cost appear to be less.

Change orders and allowances are the bane of fixed price contracts. But they are completely unavoidable in the current climate. Budget 30% more than your contract price, and scrimp and hope that’s enough. Cabinets just went up 10%, for the 3rd price increase this year. Tile just had a 12% price increase for all orders sitting in the warehouse, not just future orders. Windows doubled over this time in 2019. All materials and labor both are 30- 40% higher than 2019 prices. And it hasn’t stopped going up. Inflation is at record numbers.

To be sure, we're going to continue to deal with supply chain issues in 2022--both availability and pricing. The extent will vary from market to market. Our labor costs aren't up substantially, but the price of certain materials is. I typically receive letters from suppliers in December reporting their next year price increases. So far, the worst increase is a 30% increase in drywall prices which are already up around 25% or more from pre-pandemic prices.

In this environment, expect either cost-plus contracts or contracts with cost allowances for all big ticket items to be the norm. Where allowances are included, there should be a reconciliation of the actual cost vs. allowance amount with copies of all invoices provided to the homeowner.

Before I start this too long post, I question whether or not understanding contracts helps. The lion's share of builders are good people trying to make a reasonable living building decent homes. They may not really understand or even really abide by the contract they signed, but they are still diligently producing a good house for a reasonable cost and not attempting to take advantage of a homeowner. I often pay monies that I could probably avoid using contract law and possibly the courts, but I want my contractor to make a decent living working on my projects. There is so much communication friction when building a home that it is easy to get into an adversarial mindset and sometimes that is needed, but you should make every attempt to avoid it.

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One of the problems with attempting to understand contracts in the residential construction industry, is that the residential construction industry often doesn't understand contracts. Which leads to a further discussion of whether or not they should.

Ideally, a fully specified cost plus contract should be convertible to a fixed price contract. If you know every single part number for fixtures and have chosen the exact flooring, cabinets, etc. then bids from subcontractors are for those items. Those bids are firm commitments from subcontractors for installation of those items. Add all those bids together along with the markup from the builder and that becomes your fixed price. If a specified item ends up being more difficult to install than he originally anticipated, that is on the subcontractor and he can't raise the installation portion of the bid because of that.

In reality, these bids from subcontractors often include an expiration time and so as inflation increases the price may increase. The particular requirements for this get a bit tricky, generally if a project includes a time range then the bid must be firm for that time range. However, if the bid is for purchase of materials it will usually include a date range (often 30 days) that ignores the product timeline. If the bid is for both materials and installation then the materials price can generally increase if material costs have increased but labor and overhead can't so long as the project is occurring in the specified time range.

Most of the above comes from the contract doctrine of detrimental reliance. If I make a decision based on your promise and you can reasonably foresee that promise as a basis for reliance, then you are obligated to perform.

On a related note, allowances for items in a fixed price contract are for materials only unless specified otherwise. The default position in contracts is that an allowance is really a "materials allowance," and doesn't include storage, handling, or installation. However, contractors are allowed to modify that to a materials and installation allowance. So by default it is only materials.

Also in contracts, "cost" has a very specific meaning, which is the consideration surrendered by the contractor after all discounts and rebates. In other words, no hidden markups.

As far as bids being good for a time range ... the rules have changed with covid! A few months ago when we were dealing with the roof part of our new build, my builder said that the roofer was giving bids that were only good for 3 DAYS.

My builder will not do a fixed price contract in today's building environment. He is a small builder and can't afford to take that risk.

As far as bids being good for a time range ... the rules have changed with covid!

The rules haven't changed, more people may be ignoring the rules, but many of the detrimental reliance portions of contract law predate the U.S. and have been in place through many economic shifts.

There are a lot of ways to determine price and quantity in a contract, there are market rate contracts and requirement contracts and everything in between, but for there to be a contract there must be some way to determine the price.

A bid is good for exactly the time period the person says it’s good for. If they say three days it’s three days. If they say a month it’s a month.

A bid is good for exactly the time period the person says it’s good for. If they say three days it’s three days. If they say a month it’s a month.

I am not sure this is really the place to have this discussion, but this is not exactly true. This gets incredibly nuanced, but the concept itself is actually very simple. A contractor has a duty of due care during the bid process and can't disclaim that duty by adding a time limit. So portions of the bid are good so long as you engage that contractor. While the prices may change by reasonable amounts, the basis for that pricing may not. The idea behind this is that you can't benefit from your own fraud or negligence.

There is no bright line between acceptable and not acceptable, but a contractor certainly wouldn't be able to jack the prices up to triple the bid price because there has been a 20% price increase on materials and labor and just say, "your bid was only good for 3 days."

Almost every single time I’ve gotten a quote on anything home related it says right on the estimate/bid that it’s valid for x days only. Anyone who doesn’t read that and realize what it means is foolish. Anyone who doesn’t reconfirm the pricing and make sure everyone is on same page when the project begins is also foolish.

Almost every single time I’ve gotten a quote on anything home related it says right on the estimate/bid that it’s valid for x days only. Anyone who doesn’t read that and realize what it means is foolish.

Of course it does, I haven't said otherwise... but anyone who reads that and thinks that the contractor can then charge anything he wants after that time is also foolish.

ETA: Let's just use a simple example of a roof. Suppose a roofer bids a job to install 12 squares of roof at $500 per square. If prices go up 20% he can certainly charge $600 per square and probably a bit more, but he can't change to 30 squares of roof. In that case he would have been negligent in the construction of his original bid. Nor can he charge $5,000 per square because prices went up 20% in that case his original bid would have been fraudulent.

ETA 2: If you want to get technical... In a cost plus contract you absorb price and rate variances but shouldn't absorb quantity or efficiency variances. The same goes for bids in a cost plus portion of a contract.

No one said they can charge whatever they want.

We've recently started a cost-plus construction. The GC forwards the actual invoices to us, but charges an additional 17% fee on everything. Even earlier this year he told me that he is not doing fixed price contracts anymore due to volatility in prices. He tried to anticipate price increases in his initial estimates, but that was back in August, so now when work actually started, we are trending about 10% above budget. However even so, I like the cost-plus model because of the transparency. I know exactly what I'm getting and how much it costs. From what I've seen so far, the builder is passing on his discounts to me - for example windows and rebar have been invoiced at 30% below retail price, which was a pleasant surprise. There is also a lot of flexibility to change things on the fly, which would've been prohibitively expensive in a fixed price contract with change order fees.

This is a helpful discussion. If anything, it shows that despite what "best practices" may be, what happens "in practice" is pretty improvisational during the pandemic. Fwiw, the builders I talked with who only do cost-plus contracts, that's all they ever did, so they haven't changed their policy for this particular period. I'm guessing they started out doing renovations rather than whole custom builds, and maybe it evolved that way. Now they do a couple of new custom homes at a time, in addition to some smaller reno jobs.