I know this is somewhat of a polarizing topic but if you were building a new home today, what would be your preference with regards to your contract with the builder?

More than anything, I'd rather have a builder that I trust and has a great track record, and they may dictate one over the other.

Aside from that and just speaking for myself, I'd probably go cost-plus for a forever home. Fixed price for something shorter term.

Depends on the home, the contractor, the architect and home design, you and how much time you have to put into everything, contract structure... There's a lot of factors.

We did "fixed" but it sure didn't feel that way when it was all said and done. Our builder was awful. They get sued all the time. I agree with previous poster, the quality of the builder and their trustworthiness and commitment to having a PM on site to oversee subs would be the most important things to me.

ABATTBQ11 said:

---

Depends on the home, the contractor, the architect and home design, you and how much time you have to put into everything, contract structure... There's a lot of factors.

---

Assuming the contractor is good and trust worthy

What determinations on architect, home design, time and contract structure would be considered selecting one option over another

A lot comes down to making changes. Are the architect's plans accurate and complete? Are you set in all of your design and finish choices? If any problems or issues arise that need your attention and quick decisions, can you give them the attention they need and make them? How much time does the contract give you for responses? What's the allowable markup for change orders?

Changes and delays are a big driver of added cost. On a cost plus job your contract may stipulate that changes are just that: cost plus. On a fixed price job, changes may come with a really high markup. On cost plus a contractor is going to have to show you cost in order justify his plus. On fixed price, the price is the price and how he gets there or not is up to him. The same is going to apply to changes though. Bear in mind, a lot of these things will be scope changes or constructability issues. I can't imagine much of the latter on residential, but depending on the house it's still very possible.

If things aren't absolutely set in stone, cost plus may be the better option. If you're confident in the plans and choices you've made (and the contractor's commitment to quality), then fixed price may be the better option.

Is it possible to have a cost-plus contract with a not-to-exceed cap?

KingofHazor said:

---

Is it possible to have a cost-plus contract with a not-to-exceed cap?

---

You can make just about any contact you want as long as a contractor will agree to it.

In commercial, this would probably be a Construction Manager At Risk (CMAR) contract where the the GC charges a percentage fee on cost but gives a Guaranteed Maximum Price (GMP). Under this contract type they've already looked over the plans and specs and typically had some preconstruction input in value engineering to help the customer arrive at design they're happy with and in their price range, or as close as they can get to those. There will be contingency funds and allowances, usually under the customer's control, to cover unforeseeable issues or changes along the way. If these aren't spent, they're given back to the owner. Clauses and bonuses for early completion, savings sharing, meeting certain quality standards through testing, and other incentives for the contractor can be added as well.

The advantage here for the contractor is the lower risk when it comes to their fee. They have a lot less to worry about when it comes to things like missing things during takeoff or materials price increases affecting their cost and profitability while trying to stay under a bid price. The advantage for the customer is the known maximum price and flexibility during construction. They can plan better and have peace of mind that they won't be change ordered to death because the contractor is trying to make more money or make up a scope gap they missed in estimating. That's not to say change orders that increase the GMP can't or don't happen, but those are typically something owner requested or the result of sharing like unforeseeable existing conditions.

ABATTBQ11 said:

---

KingofHazor said:

---

nm

---

---

[color=#333333]I assume this would apply if the builder is doing some sort of design agreement during the Architectual phase. What did you mean by savings sharing above?[/color]

[color=#333333]If a builder is hired for some type of pre construction design and has lots of input on helping the client get within budget and talk through ideas etc...from the clients standpoint would it be more advantageous to have a cost plus or fixed cost agreement or CMAR in your opinion?[/color]

Texas Aggies 12 said:

---

I assume this would apply if the builder is doing some sort of design agreement during the Architectual phase. What did you mean by savings sharing above?

If a builder is hired for some type of pre construction design and has lots of input on helping the client get within budget and talk through ideas etc...from the clients standpoint would it be more advantageous to have a cost plus or fixed cost agreement or CMAR in your opinion?

---

If the builder is also handling design, that's more of a design/build contract where they own the design and construction. In that scenario, they have an in-house architect out have hired an architect to provide designs, and they own any design screw ups. Fixed price wouldn't be bad for that as long as you're confident in your decision making and don't plan to make any changes once construction starts.

CMAR could be more of a design assist, where the builder gives feedback on constructability and/or pricing. Basically, they tell the architect of what they're drawing can actually be built, and what their cost will be for what is being specced. They would also be proposing alternatives for materials for methods to meet the same aesthetic or performance requirements but at a lower cost. As an example, the architect may suggest a certain tile, but the builder can suggest a different type or manufacturer that has the same look but is cheaper. That doesn't necessarily have to happen for CMAR (there's nothing stopping a CMAR contract from being written for a GMP proposal on 100% construction documents plans), but it's typical to bring the contractor on early on order to get their design and value engineering input.

As for savings sharing, under cost plus, you would think a contractor is motivated to spend as much as they can to get as close to the GMP as possible and maximize their fee, which is true. Savings sharing means that the contractor would get to keep a percentage of the difference between the cost of construction plus their fee and the GMP. Let's say you have a GMP of $750k, including a 15% fee on cost. That means the contractor needs to spend $652k to maximize his fee and make $98k. However, if you tell him he can keep 30% of the savings between GMP and his cost plus fee, getting his costb down to $600k means he gets a fee of $90k plus ($750k-$690k)*.3 which is a total of $108k, but you end up paying $708k instead of $750k. He makes another $10k, and you save $42k. Every dollar he saves is worth twice the money in profit for him and is still a savings of like 80 cents for you. If that's something you want to propose, you toy around with the math until you're happy. Also bear in mind you don't want to overincentivize savings and spur him to cut corners. You can also do some kind of cap on that to make sure they didn't do everything as cheaply as possible to maximize profit at the cost of quality.


If they've gone through all of the work to do precon and budgeting and everyone is confident in the design and cost, I would just go fixed price.

MY house? Cost+ +Wisely choosing the builder
Suggest same for you after reading all the wise caveats above ....

what part of texas did you build in?

can you elaborate what you mean about wisely choosing the builder?

Texas Aggies 12 said:

---

I know this is somewhat of a polarizing topic but if you were building a new home today, what would be your preference with regards to your contract with the builder?

---

If you find the people that do good work consistently, you aren't going to be able to dictate their business structure back to them. They'll have already chosen how to set up their business before you found them. Winnowing out one group before even meeting with them would be reducing your number of potential good applicants.

I would anticipate that one-off dream homes have a base with cost plus for add ons. Track homes you're going to see way tighter 'perform to the cost' value engineering in a home.

On the project management barstool of 'cost, quality, and schedule-pick two' a cost plus contract is going to get you greater flexibility to hit quality and schedule at the expense of cost. A fixed cost contract is going to push material and labor risk directly onto subs and they are going to perform according to the contract and even walk if its not enough money. So you risk quality and schedule to better hit costs.

At the end of the day you're not going to be able to squeeze every last person working on your home and walk away with a significant equity due to your below market wheeling before you even sign.