Cost plus approach in todays down turn

2/17/2016 at 11:47:01 AM

Hi John,

That is a very good question.

In my opinion "Cost Plus" is a far better way to structure contracts.

It is unfortunate that this industry is somewhat disjointed and everyone is not on the same playing field it seems.

A Cost Plus contract really benefits the Client in that it makes the process far more transparent.

A GC or CPM has far more responsibilities on a specific project than any of the individual trades or suppliers by themselves and yet it is often GC or CPM that is left with whatever is left over at the end of a project.

The division of knowledge between the Client and the Contractor is often vast and the Client will always apply what they know in their day to day life to the project.

A Client will normally blindly want a Fixed Price contract because it is the only thing that makes sense to them. "How much is it going to cost me"? and once that number has been given by one or more Contractors, 9 times out of 10 it will be the least expensive one that gets the job. The Client will often spend time "justifying" why the best one is the cheapest when the rule of thumb is to dismiss the highest and lowest and focus on the middle of the pack.

That is really flawed thinking and something a LOT of Builders / Contractors are happy to take advantage of.

The real questions the Clients should be asking are: What exactly is "it" in the statement "How much is it going to cost me"? and Can I work with this person?

If the Client thinks that "I've heard the horror stories" but that won't happen to me. "I will stay on top of the project and make sure they stick to the quote". That is ridiculous.

You can often see posted here on "Ask the Pros" "How much will this cost"? "How much to drywall..."? "How much to build a new 3,200 square foot house with average to good finishes"?

Well Builders bidding fixed price could not possibly know that at that point and often, knowing that the Client will 9 times out of 10 go with the cheapest bid will simply give a number that they think will get them the job and then build from there. I see it all the time.

A Fixed Price contract can be very lucrative to a Builder because the minute that contract is signed, they have a vested interest in building it as cheaply and as quickly as possible to their benefit.

With a very detailed estimate of a project to base decisions on, a Cost Plus contract does limit the profit to exactly what they are supposed to be charging and doesn't provide the stuff of stories for the Builder to share at the pub with his friends of how he got $50,000.00 to build "X" and he/she got it done for $5,000.00.

The fear is that the Client often sees a "Cost Plus" contract as an open ended bottomless pit of money. Where in fact it is much the opposite.

It protects the Builder and the Client. The Builder now can show regulated and stable income for running the project as they should and the Client can see exactly what is going into his/her home and that everyone is being paid along the way.

It takes a lot of stress off of the Builder and lets them focus on the project at hand and handle more projects.

If only both sides could see it clearly instead of the Client believing they now have the Builder over a barrel because "he/she gave us their price", when really they have motivated the Builder to maximize their profit by getting the cheapest labour and least expensive materials and possibly even "omitting" something here or there.

We have been doing "Cost Plus" contracts successfully here in southern Ontario for years. While not all projects go that route, in my opinion it is the far better approach.

Good luck,

Jason Irving

Cedarfalls Building Consultants Limited

2/17/2016 at 9:57:51 PM

Good post Jason.