One of the insider secrets of the building industry is that Cost Plus contracts often lead to a more expensive home than Fixed Price contracts. Time and time again we see families who want to “beat the system” by doing a Cost Plus contract they will get a better house for less money.
In most cases, the reality is much different. Cost Plus contracts lead buyers into a false sense of security so they feel comfortable changing their mind, adding elements and features, going over budget or just redoing something. Often they fail to see the subsequent consequences of these decisions or dramatically underestimate the potential additional costs.
The reality is there can often be a false sense of security often leads families to spend MUCH more on their house or make decisions that will “trap” them later in the process and cost them more money to fix something.
What do we mean by “trap” (we also call them landmines)? Traps are decisions that are forced later in the process by a decision earlier in the build process. Often simple seemingly inexpensive choices early in the process can lead to big expenses later.
Examples can include;
Changing a window to a door as this now requires hardware, weather stripping, sidewalks, protective roof cover, etc…
Adding a cabinet to a room can lead to increased hardware costs, painter chargers, trim charges, lighting changes, etc…
Adding multiple flower beds will require zones to be added to the irrigation system.
When you do a cost plus contract you pay these costs as they are incurred but when you do a fixed price contract, you pay for these items in a lump sums. This allows you to see the entire scope of the change you wish to make, account for the expense and make a decision on if you really want to move forward.
Another “trap” is picking items with nominal extra costs on the surface but that create additional charges down the road.
Specialty trim that requires custom milling and can’t be returned such as clear alder versus knotty alder.
Ordering hardware that is on sale only to find out that each assembly takes 4 hours to install into a door. The carpenter that makes $50 an hour loves those types of decisions!
Adding a bonus room to an attic will often mean, more trim, paint, carpet, hardware, hvac, lights, etc…
Mistakes & Changes
Mistakes and changes are paid by the buyer as a necessary cost of construction. A Cost Plus contract means that every cost associated with the construction of the home is paid for by the buyer. This means every cost including but not limited to material that is damaged by weather, theft, broken items, items that require reinstallation, incorrectly ordered items, unforeseen consequences, etc…
When you have a Fixed Price contract, the builder builds in budget items and/or margins to cover these occurrences however in exchange for a “lower fee” from the builder,
buyers now take on that liability.
It Is Harder Than TV Makes It Seem
With so many shows on TV and books being published, we find many homeowners do not fully appreciate the daily hardships that come with a construction project.
Just as the doctor shows on TV never show what goes on inside a person’s body during surgery or how the wound heals, HGTV does not show all the micro decisions and
challenges that come with seemingly simple tasks.
In a Cost Plus Contract the homeowner takes responsibility for meeting unforeseen issues or having to incur costs to attend to tasks they never see on TV. Often this can lead to confusion and frustration to families who have little to no exposure to the building process.
When you have a fixed price contract, the builder will build those costs into the prices quoted so you can see a clear picture of all the necessary costs associated with the task at hand.
Another way to look at it is as ordering the ingredients for a meal at the grocery store and ordering a fully prepared meal at a restaurant. Having someone else put it all together for you will speed up the process and offer you a very simple means of making a decision.
Now this is not to say that a Fixed Price contract will not have some of the same challenges and issues. Also this is not to say that all Cost Plus Contracts will cost a homeowner more. However our experience over the past two decades along with observations from our professional friends is that buyers that go the cost plus path will often have a more expensive project budget than those who chose a fixed price contract.
Cost plus contracts can offer value to an experienced home owner/buyer, however it can also cost a family much more in the long run. Visit with your builder about which option is the best fit for your family.
Pricing out a home is a complicated process. Work with your contractor to determine the contract that not only offers you value but peace of mind.
If you have a question on how we can help you build a custom home, please feel free to email your questions to our offices. Garabedian Properties is a full service building firm serving the Dallas/Fort Worth Metroplex. We offer new luxury homes, premium remodels, green building/remodeling, home care services, storm/roof repairs and commercial building contracting.
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