Just like life, comparisons of Fixed Price and Cost Plus contracts have no either/or equation. Without advantages and disadvantages to both, the argument would have been put to rest a long time ago. It does not have to go on forever, however, when a little creativity and education can lead to solutions that combine the best of both.
Contracts are fear based and only necessary as a resource to cover the contingencies for when and if something goes wrong. If all the smiles and good feelings could last as the work was completed, there would be no need beyond the handshake, but in remodeling especially, surprises do occur and disagreements almost always happen.
The bottom line is that owners have a budget stretched to the max and enter the project terrified it will still cost more…a whole lot more. Quality is also important. They do not want dust in their lives any longer than necessary and they want to know the builder will be around to fix any problem.
The builder wants to be paid on time and fairly. Period.
A contract that meets these issues is the mutual goal. The type of contract finally signed gets the project started, but more than the ground rules, the agreement subtly establishes the kind of relationship going forward. Like love, we enter full of hope and the best assumptions and are usually at least willing to consider divorce somewhere along the way.
Plan A, B and All of the Above
For a fixed price, the builder takes all the financial risk and races to completion with fingers crossed. In a cost-plus contract, hands need to be held: reassurance is as necessary as the broom at the end of the day.
A fixed price contract full of allowances or a cost plus agreement with a cap on specified areas are both ways to align what often seem like opposing needs between the home owners and builder.
Novice contractors can often be caught estimating a standard grade toilet and have to mask their surprise later or risk ill-will when the client finds the second most expensive choice in the catalogue. A 2×4 is a 2×4, but so many features in a remodel are not generic. The difference between painted and stained trim, for example, is a huge expense to swallow if it was not clearly defined in the price tag.
Identifying the variables that require choice and naming a specific dollar amount–even if open-ended–grants the owner the satisfaction that the change is in their control. Color choices, siding type, fixtures and doorknobs are all important and oh so subjective points of distinction where clarity makes all the difference. Eliminating obvious surprises makes the rest less painful.
With no victim, no one is hurt.
Not to Exceed
Placing a cap on costs while still operating with the flexibility provided by a Cost Plus contract is a solution from the other direction. Arms and legs are not threatened when limits are placed either at the top or on quantifiable areas.
To alleviate concerns about gauging and motivate profit incentives, the difference between the actual cost and limit can be divided between the owner and builder. Bonuses can be placed on timelines to ensure efficiency.
Some aspects like the roof replacement can be estimated and billed as a line item at a fixed rate while something unknown like reversing a stairway can just be estimated and billed out accordingly. This requires a little more education for the laborers to track their time accurately, but provides peace of mind for all by being transparent and fair.
Accountability is key. Presenting a bill with labor lumped all together as a single item creates distrust while dividing them by worker and categories makes the owner less inclined to count them from behind the curtain.
The point of a contract is to be fair and clear, to avoid misunderstanding and provide a resource to settle disagreements. A partnership is preferred to an adversarial relationship. The tools are available to make it so that the owners in the end can be comfortable stepping out onto the balcony they just paid so much to have built.