A major decision for home owners before embarking on a renovation is whether to agree on a fixed price with a contractor or build the project on a straight cost basis. The question, in one form or another, has been around as long as carpenters have been competing for work.
A fixed price or lump sum contract is when the builder estimates all costs, allows for contingencies and marks up for profit, presenting a bottom line to the owner. If actual costs are below the estimates, he wins; if overages occur, the problem falls on the builder. There is no going back to cry, “Ooops!”
A time and material contract, also known as cost plus or T&M, arranges reimbursement to the builder for every invoice with a little extra percentage for the trouble and warranty. It costs what it costs and the risk for the owner at the beginning feels like a potentially whopping blank check and the reputation of being a fool.
Of course, there are variations in between these two options and no single version works for every client, builder and circumstance. Once again, the answer boils down to the matter of trust and the comfort zone of risk each party is willing to hold.
Fixed price contracts are every home owner’s first choice. When we go to the store to buy a shirt, we look at the price tag attached and pay it without negotiation or concern for how much each of the buttons, fabric and thread might have cost individually.
Often the initial phone call to a builder includes the desire for a square foot price (the average total cost divided by the square footage of the area affected) which is really an inaccurate measure for a remodel, considering the size, scope and complications have no average. At the end of the first look interview, after numerous ideas have been bantered around with no clear decision, the potential client inevitably asks for a ballpark figure (“I won’t hold you to it,” they promise), a wild guess that either sets the bar at a ridiculously low number against which all is measured or whacks the builder right out of the game entirely.
After careful consideration, the fixed price contract defines the size of the field, all the rules and players, even declaring the home owner a winner while the builder never knows until the dust has settled and the green grass is grown in how well he has done. Settled on the price, the owners can go on to deal with the physical stress of disruption and door knob decisions, well-prepared to have checks ready according to the schedule in the contract. Relieved from most painful surprises beyond inconvenience, the job gets done and they transfer the funds.
The builder also enjoys the benefits of planning and if all goes well, packs up tools with a tidy smile and a thicker wallet. A clear payment schedule and description of scope, defined allowances and method for change orders, and the orderly completion of tasks creates an equally seamless flow that turns each large check into countless smaller checks good to their subs 30 or 60 days later, or to employees that very same Friday. Everything lines up and everyone is happy.
The problem in a fixed price contract arises when Mr. Murphy appears to blow the best laid plans away. A simple, but large line in the estimate might have been miscalculated (computers can do that, ha-ha) or misplaced entirely. Bricks instead of wood might be hidden unconventionally inside the wall. The customers may be so convinced they said “blue”, it is better to paint the room over than to argue the point and fail to receive the check that is needed that Friday to bring the plumber back on Monday.
To keep the labor cost under control, certain tasks are inevitably hurried and corners might be cut more quickly, a little more squarely than round. The in-stock sink could be purchased instead of the special-ordered extra (and more expensive) myl of stainless steel, looking just as shiney upon installation, but showing scratches much sooner. The decision to let a bad cut fit or replace the board can more often land on the cheaper side of “close enough.”
Conscientious, well-organized and financially comfortable builders do just as well as the home-owner with fixed price contracts, often better than with the less risky luxury of a cost plus contract. The underlying costs, however, in quality and dollars could eventually add up to far more than fabric, thread and buttons combined.