Cost-Plus Remodeling & Building Projects
Cost-plus remodeling, also known as cost-plus contracting or cost-plus pricing, is a fairly common method of pricing and payment used in the construction and remodeling industry. In a cost-plus remodeling arrangement, the contractor is paid for the actual cost of the materials, labor, and other expenses incurred during the project, along with an additional percentage or fixed fee (profit margin) that covers the contractor’s overhead and profit.
Typically we hear of the Cost-Plus fee discussed as a percentage and a lot of contractors just slap on an arbitrarily derived percentage to charge (typically between 5% and 25%) but we actually done the calculations and computed our Overhead & Profit fee on the basis of how much of our “company’s time” your project takes* and charge you that way either by the day by the week or by the month depending upon the scope of the project and we have found that those Cost-Plus fees if you look at them as a percentage fall into the range of 7% to 12%.
* (using a Excel workbook I first developed in the winter of 2004 and distribute to other contractors via The Capacity Based Markup Workbook – 360 Difference)
More on Cost-Plus
Here’s how cost-plus remodeling typically works:
- Costs Breakdown: We provide a detailed breakdown of all the costs involved in the remodeling project as they are incurred, including the cost of materials, labor (usually based on hourly rates), subcontractors, supervision, permits, and any other relevant expenses.
- Markup: On top of the total production costs, the we add a fee which we had mathematically determined is appropriate for the amount of our company’s time your project takes to cover our overhead and return us a net profit. This fee serves as our compensation for their services, expertise, and risk-taking in managing the project.
- Transparency: Transparency is a critical aspect of our cost-plus remodeling projects. The contractor should provide regular and detailed accounting of all expenses and receipts related to the project to the client. This ensures that the client knows exactly how their money is being spent.
- Flexibility: Cost-plus remodeling contracts are often more flexible than fixed-price contracts. Changes and adjustments to the project scope (described and detailed in a Change Order document) can be accommodated more easily since the client pays for the actual costs incurred.
The Plus Side to Cost-Plus Remodeling
Cost-Plus can be beneficial in certain situations:
- Complex Projects: For projects with uncertain scopes or requirements, cost-plus contracts can help manage unexpected changes without renegotiating the entire contract.
- Transparent Billing: Clients who prefer to see a detailed breakdown of project expenses might appreciate this approach, as it offers transparency.
- Working Relationship: In some cases, clients and contractors may have a long-standing relationship based on trust, and the cost-plus model reinforces this relationship.
The Possible Downside to Cost-plus Remodeling
However, there are potential downsides to cost-plus remodeling as well:
- Cost Overruns: Since the contractor is not bearing the risk of cost overruns, there might be less incentive to control expenses strictly.
- Lack of Price Certainty: Clients might be uncomfortable with the uncertainty of the final project cost until the work is completed.
- Potential Disputes: In some cases, disagreements may arise regarding what expenses are necessary and how much markup is appropriate.
The Cost-Plus Remodeling Agreement
As with any remodeling project, we think it’s essential to have a well-drafted contract that clearly defines the terms, conditions, and scope of the work, regardless of whether it’s a cost-plus or fixed-price arrangement. This ensures that both parties are protected and understand their responsibilities throughout the project. We have built our Cost-Plus Remodeling Agreement off of a agreement developed by California based attorney and contractor Gary Ransone and published in his book The Contractor’s Legal Kit. California typically has some of the toughest consumer protection laws so we figured that would make a good foundation.
Variations To Our Cost-Plus Remodeling Agreement
- Standard Cost-Plus Agreement and General Conditions Between Owner and Design-Builder (Cost of Work Plus Fee with Guaranteed Maximum Price ): In brief with this contract we contract and pay for all subcontractors and specialist trades agree to a limit on the contract maximum price.
- Owner and Construction Manager as Agent Agreement (CM Provides General Condition Items & Owner Awards Trade Contracts): This contract document is used for the Owner of a construction project to designate a Construction Manager as an agent when the Owner awards all trade contracts. In other words we act as your agent and advise you on the selection of SubContractors and you as the owner then contract directly with the subcontractor.
If you would like to view a sample annotated version of our agreement or get some further explanations and clarifications as to what these different agreements entail please just fill out one of our project inquiry forms and we’ll be happy to send you one or give us a phone call to discus your project at (860) 470-7686 or email me at JHayes@ParadigmBuildingAndRemodeling.com.