People getting their homes remodeled are primarily concerned about two things: 1) Getting the job done right, and 2) Getting the right price.
In pursuit of the latter, some homeowners will look into a cost-plus contract. This is the topic of a recent blog post on Markup and Profit.
Essentially, a cost-plus contract means a contractor is paid for allowed expenses plus a little extra to allow for a profit. In theory, it sounds like a good idea. In practice, it’s another story.
First, customers don’t know what the final price will be. In a standard, fixed-price contract, the buyer and seller agree to a price, put pen to paper, and work goes until completion. Both parties agree to what work will be done, how long it will take, and how much it will cost. Everything is clearly defined and both parties know what to expect.
Under a cost-plus agreement, those parameters are not crystal clear. A job will start at one point, but then might take a different direction due to customer input, such as haggling over supply costs or the like, and delays will occur, leading to more costs.
This leads to a second major criticism of cost-plus contracts: a collapse of efficiency. Jobs under cost-plus contracts take more time because there is no true deadline, no incentive to deliver efficiently. This hurts both parties. Contractors are hamstrung by customers signing off on approved costs. Both parties will agree on what needs to be done, but might have different ideas on how to complete it. A contractor may want to use a certain product for a variety of reasons, but a customer might not approve it because he or she is strictly operating on dollars and cents. That can lead to a subpar job, making both parties unhappy.
Finally, cost-plus contracts require more oversight on contract details by both parties. In addition to killing efficiency, the constant back and forth between a client and contractor can lead to resentment. A client might think a contractor is wasting time, and a contractor could be frustrated that his or her expertise is not trusted. As the blog notes, it comes as no surprise that more cost-plus contracts result in litigation.
A fixed-price contract allows for a healthy dose of communication. The dynamic is different in a cost-plus job. And it’s always a costly one.
Have a good week!
