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Cost Plus vs. Fixed Cost

I’ve worked in the construction industry for 10 years and I’ve seen A LOT of sketchy stuff. I’ve worked for a few renovators and home builders and seen the pros and cons of both cost plus and fixed cost.

Definition of Cost Plus: The price of the project is the cost of construction plus a mark-up or management fee

Definition of Fixed Cost: The client and contractor agree on a cost for the renovation and regardless of what happens the client pays the set price.

When I decided to go out on my own I chose to promote cost plus with my clients and here are the two main reasons why:

1.   Transparency

With cost plus my clients see EVERY invoice. There is nothing hidden, they also see the mark-up and GST for each cost. If there is a way to save money during construction the clients reap that benefit.

2.   Issues Get Fixed the RIGHT way

If an issue arises that wasn’t planned for during construction with a fixed cost contract the contractor attempts to fixed this issue the cheapest way possible which is often not the right way. With cost-plus the first step when an issue arises is a conversation with the client – how should we proceed? I like to give options and then a recommendation regarding how we should fix issues.

More Pro’s and Con’s

There are many other pros and cons to both methods and there are situations where fixed-cost makes sense, see below for a more complete list of the pros and cons:

Fixed CostCost-Plus
ProConProCon
–        Cost is fixed – client knows how much they will spend–        Any changes require a change order with an additional cost–        Complete transparency, if there are cost savings the client sees those–        Potential disputes over what items are costs and how those costs are calculated
–        A higher mark-up to account for unforeseen costs–        Lower mark-up–        Uncertainty over the final cost
–        If a client selects an item that costs less than their allowance they don’t see that cost savings–        No incentive to cut-costs of supply lower end materials

Where Fixed Cost Works

If the project is uncomplicated and small than fixed-cost is a great option. It eliminates any stress for a client regarding what they will pay. It’s great when the design and selections have already been fixed and scope is set prior to construction commencing.

Where Cost Plus Works

We believe that cost-plus has the most advantages for clients. Because the scope of renovations are more fluid than a home build, cost-plus allows for changes on the fly and more potential cost savings for clients.

Final Thoughts

There shouldn’t be ANY correlation between the quality or timeline of your renovation and the type of contract you decide to go with. There also shouldn’t be any differences regarding how your contractor handles the initial planning, design and selection phase – see this blog post on why the beginning planning is so important for renovation. At Miter we offer a two-year warranty on ALL contracts, warranty is not affected by the type of contract.

 

Rebecca