Cost + Percentage With cost-plus-a-percentage (Cost + Percentage), the builder bids out or estimates all the different sub- contractor’s fees and gives a reasonable allowance for the different finish materials, appliances, light fixtures etc. These sub-contractor bids and allowances are all shared with the client and the builder stipulates a percentage that will get added to each invoice that rolls in for the project as payment for his supervision and arrangement of the work. That percentage can be set anywhere from 10-20%. Once construction starts, the builder marks up all the labor and material invoices by that agreed-upon percentage. A good aspect of this arrangement is that everything is an open book. The builder shows each and every invoice to the client. The problem with this arrangement is that there is no incentive for the builder to try to keep costs down because the more construction costs, frankly, the more money he/she will make. Most builders are reputable and honest and will not take advantage of their customers, but this set-up can generate some feelings of resentment as each invoice rolls in for ANY costs (i.e. temporary electric to the job site), and the invoice is marked up 10-20%. We feel that it is better not to structure our fee in such a way that creates a conflict of interest. Cost + Percentage is not our preferred fee structure.

The Bidding Method: This is a common approach that builders use to charge their clients. Within this process, the builder will either get bids or estimates from his subcontractors or he will use his best guess based on his experience to arrive at reasonable costs for the various labor and materials needed. He will add his profit and overhead AND a contingency fee to cover anything he might have missed. The contingency is usually about 10%, unless there are concerns that the project might go over budget for any reason, in which case the builder might add more. His bid is the total of all these numbers and is usually presented in a lump sum to the homeowner; not itemized. Usually a homeowner receives bids from a few builders before choosing the builder to build their home. There can be a wide variety in those bids since many factors can affect the bottom line. There are some significant problems with the bidding method. First of all, the numbers are only as good as the math that produced them. If the bid is way more than necessary, the homeowner will pay for it since rarely will a builder come back with an “I’m sorry, it all ended up $10,000 less than I thought. Here’s your refund check.” If the estimate is much lower than it actually costs to build the homeowner can still end up paying for it, unfortunately, since the builder will ultimately have to come back with a hand out requesting for additional funds. Additionally, and often frustratingly, in can be difficult for a homeowner to sort out where the cost variability between bids lies. If one builder puts in a bid $25,000 higher than another, it can be difficult to determine what drove the difference in that cost. And even posing that question to both builders may result in a ‘shoulder shrug’ since they would have difficulty in determining that as well. Once a set price has been agreed upon for the construction of a home, there is a built-in incentive (unfortunately) for the builder to be as frugal as he/she can be during construction. If the actual costs are less than the bid, the balance goes to the builder. There are many steps to building a home, and in many cases there is the cheap, fast and easy way. But then there is a better way that might make the home more energy efficient, or might reduce maintenance later. The better way usually costs more time or money. When the homeowner does not know any better and it makes a difference to the contractor's bottom line, the contractor may choose the cheap, fast and easy way. One can see how this method could work against the goals of the homeowner for a number of reasons. And with respect to the 10% contingency, if the project goes well and the contingency is not used, it’s all the better for the builder. This money is not returned to the homeowner— in fact the homeowner may not even know of its existence. If the project runs into unexpected trouble and the contingency is used up, the builder will start to get nervous. If the project becomes a real problem and the builder starts to lose money, service and quality will be comprised. These situations are usually where those horrific stories we have all heard emerge. The Bidding Method is not our chosen method.

Cost + Fixed Fee The cost-plus-a-fixed-fee option is our chosen method for building new homes for our clients. The way this works is that the homeowner and the builder agree on a fixed fee upfront that the builder will be paid for acting as the General Contractor on the project. Several factors are considered when determining the fee: the estimated construction cost of the home, its size and complexity, the weather, the driving time to the project site, the proximity to building materials and the local building climate, to name a few. The main difference between this and the cost plus method is that once the fee is set, changes that do not affect the amount of work for the builder, will not affect his fee. For example, if the client was given an allowance for flooring and is able to find some great material on sale, ultimately costing less for that work, the builder isn’t penalized for this. Conversely, if the client ends up choosing a more expensive flooring than was originally estimated, he or she is not penalized for this in the form of a higher builder’s fee. Cost + Fixed-fee creates, for both the clients and the builder, the fewest conflicts of interest. It helps ensure that everybody works together honestly and that upon completion of the home, everybody feels they were treated fairly. Thus, we veer from the traditional method of providing a solid estimate until the design process is complete. Certainly, we can provide some ballpark estimates for your project, but hard numbers are not put to the project until the design process is complete and the client has chosen us as his/her builder. The beautiful thing about the ‘open book’ policy of the Cost + Fixed Fee method is that the client can make educated decisions about materials and work and the budget will not be a moving target.

CUSTOM HOME BUILDING Bidding Method Cost + Percentage Our Preffered Method continued from front page…