What's the difference between fixed price and cost-plus?
The difference may not be as intuitive as people think. The names suggest the basic features, but both can be fairly complex. A fixed price contract is largely as it sounds: a written scope of work coupled with a number, and that number is usually a lump sum figure rather than the formal line-item breakdown people often picture. A contractor can choose to provide more or less information, but the bottom line is that the fixed price number is the number.
That does not mean you get everything you want within that number. The scope of work is where you need to make sure you understand what is included, and that it defines — or has an addendum that clarifies and specifies — all of the materials going into it. Not "white shaker cabinet." Custom, built at which shop. As contractors we need all of those details to put together a comprehensive lump sum.
How ambiguity turns into change orders
If there are budgets or allowances in a lump sum contract, those can change, and not only the allowance number for the material itself. Labor can move with it.
Take a budget for two slabs. You make your selection and the slabs don't come in the size you're looking for, so you need a third. That third slab is added to the materials and specifications. The fabricator is likely to charge more for the additional slab handling, possibly additional fabrication or seams. Depending on the shop you pick it from, they may charge a delivery fee separately that you are responsible for paying.
One simple example has created one to three change orders, all of it out of a lack of definition in the contract. Some people are completely fine with that style of contract. We recommend against it. Every material selection, everything added, changed or modified can affect something else, work its way into multiple trades, and snowball.
It's also worth noting that many contractors charge, or reserve the right to charge, more for a change once construction has started than they would have before it — especially a client-driven change. Contractors assume a fair amount of risk when something changes midway through a project. Documentation doesn't always get done quickly enough, and it doesn't always get to the right people, and the contractor still carries the responsibility of getting it done. Smart contractors know that midstream changes are going to cost them extra money, or at the very least have an extremely high likelihood of it compared to decisions made before construction. They may charge you more for it. That is not uncommon, and honestly, I think it's reasonable.
Cost-plus
In a cost-plus contract, the contractor provides a number or a percentage that is effectively their builder's fee — whatever percentage they deem necessary to operate their business. They don't necessarily need to prove that to you, and proving it isn't typically where the issue lies.
The issue we generally see is that subcontractor numbers are shown openly to the client in an effort to be transparent about what these things cost. Having done this for nearly 30 years, the problem as we see it is that most homeowners don't have the technical expertise to understand and qualify a subcontractor proposal. A client feels a price is too high — it's rarely too low in their eyes — and goes back to the drawing board. Sometimes that's perfectly fine. Many times they end up with a substantially deficient installation team, a team that isn't qualified, in order to drop the number significantly.
Contractors can really like these contracts, and they were prominent in years past, especially in California. At some point California decided to get rid of the cost-plus contract, or effectively make it illegal, as it pertains to home improvement projects, additions and remodels. Do your own research on that. This is not legal advice, and I can't keep up with every nuance of the legal system and contract types.
To oversimplify the reason: it's the lazy way to create a project, because it takes an enormous amount of risk off the contractor. They give you a number for the drywall, a number for the cabinets, and they show it to you. By showing it to you, they're also telling you that when they get another bill, they can show you that too. That's part of the transparency.
So if a subcontractor lowballs a number or is vague in their proposal language, it's entirely possible that you and the contractor both believed those were qualified proposals, and later you find out a piece of information or a specification was missing. Now there's a change order you had no ability to control, and the contractor puts their markup on it — that's the plus in cost-plus. If the cabinet maker comes back and says the cabinetry in the library wasn't actually included and it's another $30,000, and the builder fee is 20%, you pay an additional $6,000 in contractor's fee.
That isn't to say a fixed price contract carries no fees and no changes. But cost-plus works more like an open checkbook: the contractor lays all of their cards on the table and says they're happy to manage the project in front of them for this dollar amount, and if anything changes at all, the charging continues. We also often find that if the contract pushes longer as a result, there may be additional fees for scheduling changes or extensions.
What matters more than the contract type
Before you go down a rabbit hole on Google trying to determine which contract type is best, two things are worth noting.
First, a good contractor who has been in business for some time, with good reviews, good testimonials and client references you can call and verify, should be treating you right regardless of the contract type they use. Spend more time at the beginning interviewing contractors. Ask what type of contract they use and why, and get a sample so you can review it ahead of time. If you're interviewing well and you have a good feeling about the people before you get into numbers and contracts and the heavy stuff, you'll have an idea of whether they're going to treat you right.
We believe in the fixed price contract. We believe there's a reason California decided to eliminate the alternative from certain types of projects and contracts.
Second, the written scope of work needs to be highly detailed, and every material going into the job site, within reason, should be selected before the job starts.
Preconstruction is where projects are decided
The time spent planning is what separates good projects from the ones everyone hears about: I can't get a hold of my contractor, he showed up for two weeks, collected his first paycheck, and we haven't heard from him in four weeks. The contract allotted six months less than the job actually took. We get those phone calls almost every day, literally, and have for the last 20 years.
The cause is the same every time. People got excited to start, didn't do much homework, didn't plan with their contractor, and didn't find a contractor who was going to spend time getting the project right on paper before signing a construction contract.
Ask a contractor what their process is for preconstruction. Preconstruction is what it sounds like — the things you need in place before construction can begin. If you don't do it, you'll be figuring it out in the middle of construction with your house upside down, stressed, spending more money. Either contract type can come with a paid preconstruction services agreement, and when you do it, it's always money saved.
People are spending a substantial share of the original purchase price of their home on these remodels. There's no reason to rush something of that expense on what is, for most people, the largest investment of their lifetime just to get it done fast. Most people know what things look like when they're done fast versus done right, and your friends can tell too — they may say one thing to your face and something else once they leave the house.
At the end of the day it should be about you: being excited for the project, getting it done right, and being happy with it rather than worrying what other people think. At the same time, don't let a contractor charge you too much because they didn't spend the time organizing with you. Be careful with that window when you first get excited about starting, because that's exactly when you should be protecting the investment rather than rushing to spend the next portion of it.
Contracts matter. Contract types matter. In my opinion the contractor you choose and the time you spend with them before construction matters more, because the contract becomes a document nobody references during the project as long as you and the contractor have planned things out and understand what you're doing before you ever start. Find the right contractor, and make sure they have a good process to help you protect this investment.
