Residential Construction Contracts: Cost Plus Fee

Bob Borson —  August 9, 2013 — 66 Comments

Today is Part Two of a series of posts that are addressing the different types of contracts homeowners normally consider when working with a general contractor. Yesterday I discussed the Competitive Bid process which included most of what I think are the few positives and most of the negatives to using this method when evaluating and hiring a contractor. I don’t generally like them because I believe it creates an adversarial atmosphere in what should be a collaborative team environment. The competitive bid process is one of the two most common methods we typically use in our residential architectural practice. The other, which will be the focus of today’s post, is the Contractor Cost + Contractor Fee Contract – commonly referred to as a “Cost Plus” contract.

Residential Construction Framing

Cost Plus Fee Contracts
The Cost Plus contract has been gaining more and more traction in my world over the last 12 years and is now my preferred contract. When I discuss the process of hiring a contractor (both the when and the how) I always talk about the different sorts of contracts we might consider using use because it has an impact on the timeline. Competitively bid projects don’t generally involve the contractor until the very end of the construction document period – once all the decisions have been buttoned down and successfully represented in the drawings and project specifications. By contrast, the Cost Plus contract typically involves the contractors really early in the design process – sometimes as soon as the completion of the schematic design phase when the only design drawing is a floor plan. But I’m getting ahead of myself – let’s talk about the Cost Plus process before we get into the advantages.

A Cost Plus Fee contract with a contractor is exactly what it sounds like – the actual cost to build your project plus a management and coordination fee for the general contractor. The management and coordination fees are generally a predetermined percentage of the actual costs. In my neck of the woods, we typically see around 15% as the percentage used regardless of the skill level of the contractor. That might sound peculiar, that it would seem obvious to assume that “more better” contractors can charge a higher percentage fee than just “better” contractors … but you would be wrong. The more better contractors make more money charging the same percentage rate for the simple reason that 99 times out of 100, they work with better subcontractors who charge a higher fee for their work. See? It’s pretty simple and obvious when it’s laid out. I’ll admit that a really skilled contractor can get a better product out of an inferior subcontractor than a less skilled contractor but those are typically isolated instances and most of the more better contractors I tend to work with eventually weed out the sub’s who create more problems than they solve.

One of the significant advantages of a Cost Plus contract is that the contractor can be brought on very early in the process and can be a valuable member of the design and construction document process. Most contractors can start providing “budget” pricing with just a plan. Since a high percentage of homeowners think that the only way to get the best price for the end product is a competitively bid process [where all the contractors are put into a cage match and have them slug it out over the price until the lowest bidder is left standing victorious] the idea of paying the contractor whatever he charges PLUS a management and coordination fee is ludicrous. Cost Plus contracts let the contractor develop pricing at various points of the creative process and they help manage the expectations of the finished product. The contractor is also an asset to the architect (me) by helping me solve certain problems as they develop on paper rather than in the field when someone is going to have to pay to build it, tear it out, and then build it again … not really the most cost-effective way to solve a problem. Before you say “that’s not my money, the contractor has to pay for their mistakes…“, let me point out that most people get loans from the bank to finance their construction projects and they pay interest on those loans … since we all know know that Time = Money, as the homeowner paying interest on your construction loan while the contractor is fixing a problem, even when you win, you still lose.

Architects desk

Every project that I have managed and processed over the past several years where the contractor used a Cost Plus contract, the costs are completely transparent. Unlike competitive bid projects when the actual cost of things is a total mystery, the Cost Plus contracts require the contractor to submit a bill or invoice for every single expenditure on the project. If they run over to Home Depot and buy a box of nails, I’ll see the receipt when I process the application for payment. Most of the applications for payments on a Cost Plus contract could be used as ballast to anchor a battleship they’re so extensive. Keeping track of the expenses is paramount to the success of a Cost Plus job because if the contractor can’t produce a bill of sale, they can’t submit it as an expense.

One thing that needs to be made clear about Cost Plus contracts – the contractor is still bidding the work! In fact, contractors bid the work far more often in a Cost Plus situation than in a competitive bid process. They are constantly providing budget estimates throughout the design and construction document process and when the contract is finally executed and the owners are going to the bank to get their loan, they are bringing in the final budget bid that the contractor provided. It is this same budget bid document that I use to track the progress of the project and measure percentages of the billed work completed when I process the applications for payment for the contractor. To use an analogy from yesterdays post, this bid budget can let the homeowner know what size bed they are getting into before they buy the bed. Another benefit that most people don’t consider is that the competitively bid project tends to create a lot of change orders (move an outlet – that’ll be $125) for every possible modification along the way. As many times as not, when the homeowner changes the scope of work in a Cost Plus job, there isn’t any change in the total cost for that scope. The electrician installing that electrical box is generally being paid time and materials for the work he does and since moving or adding a box literally takes a few minutes, you don’t get dinged for all the little revisions. Imagine that you are installing 100 outlets in your house and the fee to install them is $8,000. Most of the time if you come in and add another 10 outlets you’ll still only pay the $8,000 and not an additional $1,250 for 10 outlets at $125 per outlet.

**On a side note, since the owners get a copy of these payment applications, they know the names of every subcontractor and product on their project. If years later you want to modify the gate latch on your fence, you could always go back to your paperwork and see the name of the person who originally performed the work – amazingly valuable information if you ask me.**

Last, but not least, I want to spend a minute talking about what I think is the single most valuable aspect of the Cost Plus contract – teamwork. The single largest issue I have the the competitively bid project is the adversarial environment that is created in which everyone is keeping an eye out for themselves to make sure they aren’t going to get screwed. In this instance where the competitive bid is bad, the Cost Plus contract is fantastic. The contractor knows that he is going to be compensated for the full extent of the work he is asked to perform – which I think it is fair to say that most people think that’s completely fair. Another benefit to the contractor is that since they know they aren’t going to get penalized for making a mistake during the bid process, they are far more likely to fix genuine mistakes when they happen without having to be caught and told to do so. Contractors have a bad reputation for cheating people and I’m not sure that it’s entirely deserved. Whenever you force someone into a corner, the only way they can get out is going over the top of the person that put them there. Mistakes happen and most contractors don’t have an issue with fixing their mistakes – it’s when an honest mistake is made and they are forced to suck it up and pay for it …. well, I just don’t think it’s a very collaborative position to take to make a person give you something without expecting to compensate them for the work. Cost Plus contracts expose all the costs so the owner pays for what they receive and the contractors are compensated for the work they provide. Since the architect isn’t having to play the heavy and go looking for the stuff the contractor is trying to get away with, architects are more likely to be open to what the contractor is saying, the financial bullsh*t filter is removed and everybody’s cards are on the table.

All that’s left is that the three interested parties have the same goal – to complete the project with everyone walking away thinking that they got what they wanted … and ideally what they expected.

Cheers,

Bob signature

 

  • Andrew

    Hi, I see one of the posts mentioned Cost + a Fixed Fee for the GC. I am assuming this is different than Cost + a percent…if so how is the Fixed Fee established? Do the home owner and GC agree on a costs estimate upfront and establish the Fee or is it done some other way? Or am I not reading this correct and Fixed Fee is just the percent charge on top of the actual costs?

    • http://www.lifeofanarchitect.com Bob Borson

      It depends on the sort of contract used (AIA versus an individuals custom contract which is how a lot of contracts that come into our office are presented). At it’s lowest common denominator, cost + fixed fee and cost + percentage are the kind of the same thing (although the fee does not necessarily get derived by a percentage of the whole). You can further complicate (or simplify) these contracts be establishing percentages on items that fluctuate in cost and establish a fee for certain aspects. I’ll use drilling piers for a residential project as an example. You pay for piers by the depth and the amount of oversight and coordination isn’t dictated by the depth. It isn’t all that uncommon that a fee per foot is established for piers and separated out from the overall percentage portion of the contract.

  • Wonderer

    Question for you, on the cost plus method, is the builder’s percentage fee calculated on the materials cost and the labor cost, or just the labor cost?

    • http://www.lifeofanarchitect.com Bob Borson

      on everything

  • NH

    Hi Bob (and all),
    I’ve received a contractor’s estimate that includes the 20% markup for overhead and profit, but additionally adds $65/hr billing for a project manager, for the duration of the project. By my calculations, this will add 15-20% on top of the total, and only if they stay on schedule. Is this normal, I’ve never heard of such an additional item? Everyone I’ve spoken with is surprised, as in our experience this project manager is included in the total construction cost. The client and I are nervous that this could really add up – any suggestions? Thanks!

    • http://www.lifeofanarchitect.com Bob Borson

      I’ve seen it done the way you are describing – but mostly on commercial projects. If I had a residential contractor that wanted to mark up the work and charge a separate hourly rate for a project manager, I would at the very least make sure that it was not included in the scope of work that was marked up (then your $65 PM is actually costing you $78)

  • Gobers

    Hello Bob – that you for being a resource in this field! Building a new home is a daunting task …
    We just received our budget for a new home in Houston, TX – it is a cost plus 18% contract. I was surprised when I saw a $48K fee for “project management, warranty and draw administration” included in the budget. This seems like double dipping. While it is a builder’s market right now, this seems at the very least high.
    Also, is it reasonable to ask a builder to share builders risk and workers comp insurance?
    THANK YOU!

    • http://www.lifeofanarchitect.com Bob Borson

      it does seem like double dipping but it isn’t completely unheard of unfortunately. While you might not like it, it is a sign that you have an honest GC because some of the folks we have seen bids from simply bury that additional fee into the bids from the trades. Most of the contractors we work with don’t charge this separately but it is contained within the “plus percentage”. The moving part to this – and the part that can make your head explode with education – is that there are sorts of line items that either are, or are not, included in the bid that could make up a big part of the difference between those that charge a percentage and a fee and those who do not. Things like:
      Permit
      Insurance
      Site Facilities
      Fuel and Vehicle expenses
      Phone/Fax
      etc.

      It’s not as easy to simply look at the two parts and make a judgement, you have to pull some things apart to make sure you can do an accurate comparison.

      Best of luck on the new home

  • liaqat hayat

    What about scaffolding put up by the main contractor specially for the sub-contractor’s additional work. Is this assumed to be included in General Attendance fee charged or it can be requested to be reimbursed separately?

  • Gk

    I assume that the Builders Risk policy would also be classified as a cost and therefore there would be a markup for it. Is that also true for the General Liability Insurance? My insurance carrier does not provide an invoice for each project but only an estimate at the front end of the year and an audit of actual expenses at the end of the year for the “real” cost.
    If the project is a good drive away, is the mileage or fuel to get there reimbursed somehow or is it absorbed in the markup?

    • http://www.lifeofanarchitect.com Bob Borson

      the answers to those questions can be either yes or no – there aren’t any rules here, just what the contractor chooses to charge (or at least disclose) and what you are willing to pay. Normally Insurance and BR are costs carried or charged to the owner per project. Gas and mileage are job specific … but it’s not like the contractor didn’t know where the project was when they were bidding.

  • NES

    Bob, this may be a silly question but with regards to what the cost plus percentage is calculated from… what does it exclude? Would appliance purchases be included? What about things like security system installation? What would you include for the percentage to be calculated off of vs. what would you exclude? Thanks so much.

    • http://www.lifeofanarchitect.com Bob Borson

      not a silly question at all –

      Anything that the contractor has to carry in his expenses, receive on site, oversee installation, provide protection of, etc. those would fall into the contractors scope. You could pay for the appliances yourself but it wouldn’t be fair to the contractor to pass on responsibility of any sort to the contractor without compensating them for any of the responsibilities I listed above.

      Hopefully that makes sense.

  • Tim Hoeft

    Bob,
    I’m an architect in FL finishing up DD drawings for my own home and this has been a great resource for me – THANKS!
    Could you comment on the related AIA contracts most similar to this approach (A102, A107, A133) or share an example contract for reference? Any help is much appreciated, so much thanks in advance!

    • http://www.lifeofanarchitect.com Bob Borson

      I’m not a lawyer so take this all as casual information shared –

      A102 – standard agreement between owner and contractor which is basically a cost plus contract but there is a guaranteed maximum price.

      A107 – basically a cost plus contract (make sure you also use A107 Exhibit A)

      A133 – basically it’s the A102 but using a construction manager (owner’s rep) as the contractor

      If I was to use an AIA contract for my projects, I would use the A107.

      As far as posting an example of my contract, I don’t really feel comfortable doing that, not to mention I had to pay an attorney to wordsmith it for me.

      Cheers

  • Jean-Pierre Louis

    Bob, is the 15% fee you see a markup fee or a margin fee? We’ve been looking at contractors and have been running across 15% margin fees. As always your site is a great resource.

    • http://www.lifeofanarchitect.com Bob Borson

      markup fee

      Cheers

      • Jean-Pierre Louis

        15% mark up doesn’t seem as common here in Austin. Thanks again.

        • http://www.lifeofanarchitect.com Bob Borson

          maybe it’s the contractors you are working with – we have a $2M project going in Austin right now and all the contractors (5) we interviewed had a 15-18% markup

          • Jean-Pierre Louis

            17-18% I’ve seen, our project is maybe a quarter of yours. Still need to talk to a few contractors. As the homeowner I have to say pricing has been my least favorite part of the home building process.

          • http://www.lifeofanarchitect.com Bob Borson

            give it time … sometime it gets worse ;)

  • yetanotherjohn

    I’m not sure the cost plus model really makes sense from the home owners standpoint.

    Let’s consider the narrative. The nice couple in their 70’s who are building the home decide that they want LED vs CFL light bulbs. You can’t think of a nice way of asking them if a 25 year payback period is the right time frame for them to consider and like their grand kids, so put the LED bulbs into the spec/design. Let’s assume that a $0.45 mark up is appropriate for the contractor to source the CFL bulb, get it there on time, etc. Just what part of the “mo betta” contractors expertise, time, etc. justifies the contractor getting paid $4.50 instead of $0.45 to source the LED bulbs vs the CFL? And if the contractor screws up, forgets to order the LED bulbs over the internet and has to buy them locally at a $3.00 premium, not only does the home owners get stuck with the higher cost, the contractor gets an extra bonus of $0.45 a bulb for screwing up. You get what you reward for, so why is this a better deal for the homeowner?

    Now the contractor’s assistant (wife’s nephew named Dufus) decides to show off his mad juggling skills with the bulbs and drops one. Not only does the homeowner get to bear the cost of buying another bulb, but the contractor gets another bonus. Here Dufus try juggling some more.

    Homeowners do a walk through during the building process and notice that some of the quarter round trim isn’t following the floor, but making an independent sine wave. Homeowner points this out to contractor who promises to make sure it gets fixed. The fact that the contractor didn’t catch it while the trim carpenter was there doesn’t speak well for the contractor, but let’s give him some grace. But that grace comes at the expense of the homeowner. Who pays for the new trim (since the original trim broke when being taken off), the painter to come out and do touch up, etc? Who get’s a bonus for not doing their job right the first time?

    Imagine that you notice that not all the plumbing is in the right place after the slab is poured. You as architect might make a note to never start a build on March 18th with O’Reilly construction again, but the homeowner gets to pick up the tab to fix the problem and O’Reilly gets a bit of the hair of the dog bonus to cheer him after his screw up.

    If the contractor screws up and is 10 boards short, who pays the extra $50 + 15% delivery fee? If the contractor and plumber spend an hour Monday morning re-hashing the big game from the weekend, who pays and who gets an extra little bonus for talking about sports? Just a hint, it isn’t the homeowner who benefits.

    I think you get the point now. It’s hard enough to justify the increased contractor earnings based on the quality of the materials, but even harder to justify rewarding bad behavior. I suspect a lot of what you discussed about architects getting paid by the hour for their work could apply to the contractor getting paid cost plus.

    So what is the solution? I’m not sure. I agree that the competitive bidding option has flaws. It encourages the contractor to low ball the bid to get the job and then make it up with change orders and cutting corners. But the homeowner is the one least able to control costs, so why put all the risk on them?

    Perhaps we should be paying the contractor a fee for budget estimating through the process. I understand that the architect’s skills in developing estimations may be lacking. It’s similar to the reason you hire the structural engineer or a landscape designer in addition to the architect, you pay for skills that the architect could do just not as well (or in the case of the structural engineer is required by the insurance company). A $1000 up front fee or whatever wouldn’t fully compensate the contractor for his time, but when it came time to bid he would have a leg up as he would already know the project, have had a chance to steer the project towards his strengths and even if he doesn’t win the bid he gets a little something for his work. This up front fee should buy a lot of the advantage of the cost plus model.

    A fixed price model puts the risk on the person best able to control the risk, but the homeowner pays for the risk indirectly anyway, can still get nickel and dimed to death with change orders and at the end of the day may just have bought a lawsuit if the contractor doesn’t deliver.

    A competitively bid of cost plus fee may make more sense. The contractor who just bids a straight percentage would be at a disadvantage to the contractor who recognizes the difference in his role between CFL and LED light bulbs. The contractor doesn’t get a bonus with each screw up.

    A upfront consulting fee during design followed by a competitively bid cost plus fee with a penalty/bonus schedule for missing/hitting/beating the cost/time estimates may be the best model. You get the benefit of the up front cost estimate, the contractor gets some compensation for his iterative estimations, the inside track for the competitive bidding and has some skin in the game for hitting the cost estimate. The risk on cost is going to still be with the homeowner, but then it always will be anyway. The risk at least partly spread to the person most able to control the risk through the penalty/bonus. The fee bid can reflect the actual work rather than see inflation based on the cost of the materials when the work for laying the tile would be essentially the same no matter the cost per tile. Change orders have the advantage of the cost plus though if there are enough of them the contractor could lose out in his fee. Perhaps the bidding process could specify a number of change orders and an increase fee when you go beyond that number. A discussion on what role the architect played in the change order would be a separate discussion.

    Bottom line is besides making the architects life easier, I can’t see how the cost plus model is in the best interests of the home owner.

    • Han

      John is spot on. Bob is ignoring all the risk and costs passed on to the Owner. Totally written from the perspective of the Architect (whom is not always in the best interest of the Owner)

      • dan

        I see where John is coming from, but he’s painted a pretty poor picture of a contractor and these people have to be weeded out by the Arch. Some other things to consider: If someone is building their dream home then they might want to change things part way through the process. Bob mentioned the price of change orders in a contract and they aren’t cheap. One uncharged change order can make up for a lot of dropped light bulbs, but the difference is both parties are still happy and working together. Another big one is that mistakes and accidents still happen on fixed price contracts. The contractor has to fit a certain amount of that into his/her bid. If the job goes perfect then it’s all profit. If not, then they’re paying for more light bulbs. Bottom line is that the home owner is likely still paying for some in-discrepancies like John describes, even in a fixed price contract.

    • Justin Zeller RI

      Sounds like a terrible contractor, and it sounds like the selection process was poorly executed. Vetting your possible contractors should take many other things into account than just dollar figures.

      Consider the contractor who’s made all those mistakes on a fixed price contract. Now, because he was made to fix everything that was visible and was “caught”, he is closing in on bankruptcy and can’t make payroll unless he roofs the house for a payment before the fascia and rake trim are on–and that isn’t his only work around. He also sides part of the house with no house wrap installed first. True story, I’ve consulted on a short sale rehab in MA, on a $1M home, where the new owner had to re-roof and re-side a new house. In a case like this, it was definitely the homeowners who took the risk and lost.

      When it comes to building and remodeling contracts, every relationship is different, and no one solution is going to work for everyone. Whether the homeowner decides their best fit is a cost plus or a fixed-price contract, the most important step in remodeling or building is the selection process of the builder. Homeowners should walk-thru a builder’s current project. Talk to past clients. Read the builder’s posts and websites and reviews.

    • http://www.lifeofanarchitect.com Bob Borson

      I should put the descriptor on my point of view in that I don’t work with bad contractors and that solves a lot of the problems that occur on residential job sites. I would also go so far to say that on the higher cost than average projects that I get to typically work on, that homeowners and their impression of how the project went is extremely important – the contractors are reliant on having a happy client at the end of the project because there is a small community of contractors that work on these expensive projects.

      All that having been said, I can paint a picture that can make any contract look terrible. The construction documentation process doesn’t change on my side of things based on the final contract type so my life isn’t appreciatively changed one way or the other.

      The problem with competitively bid cost plus jobs is that a contractor may get the project because they are the low bid but when the pay applications come in, line items from the bid don’t align with the pay application – all the contractor has to say is that “the cost changed”. Many of the projects I work on take 2 years to complete and few people will honor a bid more than 3 months old.

      Also, your analogy of the concrete mistake with the owner shouldering the burden is ludicrous – under what contract would the owner be required to absorb contractors errors, oversights, damages, and overruns? We don’t pass screw-ups on to the owner and if the person reviewing the applications for payment isn’t on top of things, that’s not a problem with the contract, that a problem with the oversight.

      I don’t expect the owner to pay for mistakes, but I also don’t expect the owners to get something for free because someone made a mistake. The cost plus model works when the adversarial relationship that typically exists is removed.

  • Ryan

    Hi Bob, How is construction Manager CCDC5B different from Cost Plus ? now that 5B is used by most contractors, is cost plus CCDC 3 still viable procurement method?

    Thanks,

    Ryan

    Construction Management student

    • http://www.lifeofanarchitect.com Bob Borson

      Those are Canadian contracts if I’m not mistaken – and I have no familiarity with them.

      Sorry

  • Pingback: Renovation Education: The Benefits of the Cost Plus Fee Contract | Renovating NYC

  • athlondi

    Hi Bob,

    I was wondering if anyone uses a Cost+ model that includes an element of risk sharing? It is common enough in defence contracts, whereby cost overruns are split between the contractors and the client. It allows you to avoid the issues with a competitive bid process, but also provides greater motivation to contractors to come up with solutions to unexpected issues and to control costs as well as they can.

    I am slightly perturbed by the idea that a better contractor makes more money on a % contract because he uses more expensive subcontractors – where on earth is his motivation to avoid expensive but not *better* subcontractors? Its the client’s money after all! I agree, reputation does have an input, but it is a very murky feedback system between not controlling costs 100% and losing business in the long-run. Surely “better” should include “controls cost well” on top of “produces quality results”?

  • Norman Lewis

    Bob … The boys ’round here want money for 10 more outlets, unless the contract stipulates that the fixed fee percentage applies only to the total original amount. Or, if the fee is a fixed dollar amount charged one time. Otherwise, T&M sheets approved by the arch/owner rep may be the best way to go.

    • http://www.lifeofanarchitect.com Bob Borson

      I should clarify – everyone is getting paid, it’s just that the actual cost (after the fact) might end up being less than the estimate (before the fact) once the bills and invoices are submitted

  • T. Dustin Hauck

    Hi Bob. Love your blog. You do a great job at explaining many of the components of our profession in terms that are easy to understand. These are topics that are not discussed often enough. You should consider your own Handbook of Professional Practice that touches on the issues left out of AIA’s version. It could be a resource to architects, contractors, and clients.

    We also prefer the Cost+ method and agree with most of your comments. One issue we run into is compensation to the contractor for budget assistance early on in the design process. The contractor puts in a lot of time reviewing designs, attending meetings, generating/revising budgets, etc. How do you deal with compensation for this early phase to the contractor? This is a valuable service that can be difficult for a client to grasp compensating for. Many times, the client looks to the architect as a cost estimating resource, when that is not usually the architect’s defined position, and clearly outlined as such in the contract. Winning the project is not compensation enough for most good contractors. Those good contractors have better things to do with their time, such as getting paid for it. And, this early work is above and beyond their typical proposal for the project. How should the contractor be compensated for this additional time? There is a fine line to be walked when asking preferred contractor ‘A’ to assist on a project budget only to find out later that the client awarded the project to another contractor ‘B’, especially when the architect also relies on contractor ‘A’ for referrals. It is not a comfortable scenario, but does happen. Clients don’t always listen to their architect’s recommendations. I am sure the contractor would rather we building a project than preparing budgets and not building.

    Keep up the good work!

    • http://www.lifeofanarchitect.com Bob Borson

      Thanks Dustin,

      The short of it is that we never pay the contractors for the time they spent on the front end working through estimations early on in the process. Not that they shouldn’t get paid mind you, we just don’t see it happening in our area of the world. As such, we (the architect) are mindful of the time and tasks we ask the contractor to take one and the number of times the contractor has been burned has been very few. I recently had a project where the contractor spent probably 100 hours working through designs, reviewing structural foundation systems, meeting with the client, preparing budget estimates … only to have the project die. It breaks my heart on many levels but I do feel empathy towards the contractor. When I told him how sorry I was, his attitude was terrific and I realized that this is partly why I love working with this particular builder. Does it translate to more opportunities for them? Absolutely! And I am happy to explain why to anybody who would ask.

      • Mark

        In the commercial world, when the GC is brought on early at schematic or DD phase, they are generally paid for their “preconstruction services” which includes estimates, drawing reviews, constructability reviews, etc. The drawing development cycle for a commercial project is much longer and on such contracts, often times 1000’s of hours are spent by the GC to review the drawings for construcability, completeness and to provide estimates. It would not be equitable to the GC to have him provide these services without compensation.

        • http://www.lifeofanarchitect.com Bob Borson

          absolutely right

          • Rob

            Bob,
            Just ran across your blog. Informative and thought provoking – hopefully your clients take the time to read it as well.
            Great post, the contractual issues discussed in this post and your last seem to be forever ongoing in the construction industry. As a small GC who does both custom residential and light commercial work, the issue of preconstruction cost planning reimbursement is in fact on ongoing issue for us. As discussed above, for whatever reason the expectation is that it is acceptable for a GC to be compensated for one’s time & effort for this work in the commercial arena – but not for residential projects – continues to baffle me. Just curious how you square the the one vs. the other?

          • http://www.lifeofanarchitect.com Bob Borson

            To be honest, we don’t pay commercial or residential contractors for their time in providing bidding – but we don’t waste their time either. Most of our contracts are set up so that the contractor is selected based on qualifications, not lowest price so the amount of work we ask a group of contractors to take on is to become familiar with the project prior to the interview process. If they make it past the personality round, the project is theirs and pricing is part of their overall compensation package.

          • Rob

            Question for you Bob. With one of the primary aspects of fixed price vs. cost+ contracts being the assumed “risk” factor and who carries that burden (owner vs. GC), the understanding is that a GC will usually plug-in a reduced profit margin on a cost+ contract vs. a higher one under fixed price.
            So with all other factors being equal – job complexity, size, travel time to jobsite, etc. – what do you see as an equitable difference in a GC’s profit (only) markup – or margin – for the jobs you are involved in? In a steady market, I usually shoot for a 10% profit markup (not including overhead) on fixed price contracts and a 7-8% profit markup for cost+. This % difference along with a 2-3% contingency line item give sthe Owner the potential to save as much as 5% on the toal cost of a job under cost+. I’ve heard other architects & GCs speak of 5% profit markups but that seems too low and a likely way to run ones self out of business in the long run. Curious as to what the ‘norm’ might be in your neck of the woods.

  • John Yurko

    Hey Bob,
    Great blog, great post.
    I agree on the Cost + model, and prefer it with one slight mod, that most GC’s in my area agree is a good middle ground: Cost + Fixed Fee. The perception is there, right or wrong, that a Cost + percentage could cause the GC to not work as hard as possible to control costs. If you negotiate a contract where the GC gets a fixed fee (based on a standard percentage, say 15%), then he knows he’s getting his money even if the project comes in under his estimate.
    Cost + works well if the contractor is a known, trustworthy, well-referenced outfit, and if the client has some risk-tolerance. It has the potential to deliver the project at the lowest possible total cost. It allows for a limited set of drawings, too, if the owner is open to the architect and/or builder doing on-site design & problem solving. Most GC’s self perform only about 20% of a job anyway, the other 80% is bid out competitively to the subcontractor community. And I can’t agree more with benefits of the team framework.
    Stip-sum contracts still have their place, especially if the client is the type that wants a fully detailed set of drawings, and has little or no risk tolerance.
    Your commenters were right on about the ‘transparency’ issue and about spelling out in the Cost + contract what exactly are costs to the job, even with gray-areas such as cellphone minutes and admin. overhead. And I ALWAYS stipulate that all receipts submitted as ‘costs’ include a jobsite address. If it doesn’t, don’t bother submitting. You don’t want the GC ordering 6 loads of concrete, one of which gets delivered to his in-laws for a new sidewalk. This type of thing rarely happens any more with reputable GC’s, but it’s at least a way to establish from the beginning that paperwork must be in order.
    Also, it’s a good idea to require lien releases from all subs and GC as a condition of payment thru the job. This has saved me and the owner many times.

  • Paul Hamtil

    Great posts on the two types of bidding processes! I could not agree more that a cost plus scenario promotes a higher level of collaboration and teamwork from the inception of the project. Generally, this promotes greater success in the execution of the project, and a better opportunity to keep to the budget. I like the idea of the final budget proposal being relatively “firm” on cost, as the risk I see from cost + is that if you do not have a manager, such as you described your role, the cost could exceed the expectations of the client and begin to cause resentment and hardship. Setting a good, clear budget course at the beginning is critical.

    From my perspective as a contractor, another drawback to competitive bidding is that not all architects are created equal either. Your process of vetting, project builder selection, collaboration with, and supervision of contractors is not practiced by all architects. Some have no real process at all but drawing plans. This scenario might be:

    A client approaches an architect about a project, a budget may or may not be discussed, construction plans are drawn, and then the client begins to solicit bids. When the bids start to come back high, the client is forced to then revise the plans they may have already paid for producing/ duplicating, abandon the project, or keep soliciting bids until they find the price they are looking for. A bad situation for every party involved, and a case for early collaboration.

    Final comment to the subject of markup. As some may believe, there is no standard markup in the construction industry. Markup can vary, and should, based on factors such as sales volume, overhead, profit, and what type of markup a contractor is using. I would never allow anyone to dictate what I can charge for a project, for what we must charge to run a sustainable business and what the public thinks we should be allowed to charge do not always align.

    • http://www.lifeofanarchitect.com Bob Borson

      Great points Paul, I appreciate you adding your perspective to this conversation. We do see different markups from different contractors, the ironic part is that the difference isn’t normally between the skill level of to different contractors, but rather the project types they work on – renovation/ remodel projects typically see a higher percentage markup than new construction.

      Cheers

      • Mark

        Makes sense that contractors charge a higher fee for remodel/renovations. They are riskier and often times smaller in project value but still require a similar amount of management hours to run the project.

  • http://www.osterlundhall.com/ Steve Hall

    Hey Bob, (take that the Southern way)

    You forgot to explain the “plus”! How much is that again? :)

    Steve

    • http://www.lifeofanarchitect.com Bob Borson

      FYI – I would always take “Hey Bob” in the Southern way.

      Overhead – as I’m sure you are aware, is a slippery thing and depending on how the contractor presents his information , you might not actually know a) what your paying overhead on or not, and b) how much actual overhead you’re paying. Most of the contracts I see, the GC’s have a percentage markup for overhead AND profit lumped into a single percentage number and once all the receipts are added up, that “multiplier” get added. The one moving part on this process is whether or not the GC has broken out a superintendent fee mixed in as a line item cost (expense). If so, I generally position myself so that any direct expenses from the GC and south of the tally line so the owner isn’t paying overhead on the superintendent fee.

      • Francisco Garcia

        You’re a great resource Bob. Thank you for your posts. As an Architect and Contractor, this is how we break down direct costs versus overhead and profit in the construction phase of our projects:
        Direct Costs:
        Payroll (including worker’s comp & employer taxes for field workers and for administrative/accounting/recordkeeper)
        Materials
        Disposable tools (like skilsaw blades)
        Gasonline
        Rentals
        Subcontract Labor
        Permits & Inspections (building/parking/special inspections)
        Permit revisions
        Water & worker safety
        Disposal fees
        Parking permits
        Cell phone usage that is job-related
        Overhead:
        Liability Insurance
        Licenses
        Office rent & utilities
        Tool repair & maintenance
        Vehicle Maintenance, Insurance, & Registration
        Business Licenses
        Marketing
        Office supplies
        Software (quickbooks, excel)
        When it comes to Architecture operations, the list is different.

  • Mark Mc Swain

    Getting that interaction between the parties can be vital for bridging that imporatn gap between SD and CD.
    This, because, it’s possible to set into motion explicit design intent in SD, that winds up being an issue in CD–or, worse yet construction. This is particularly true if a detail was selected to express the design in an economical way; but the material selected dose not behave in all the ways the design is expressed. These can be serious “gotchas” as well as minor ones.

  • Serge

    Hi Bob,

    From my perspective of someone who will be building a modern home in Colombia, the “pure” Cost Plus model advocated in this article has some downsides:

    1) Our architect is located in another city and cannot select a contractor where our house will be built. There is an assumption in your Cost Plus method that you (the architect) pre-selected a contractor to work closely with him, presumably based on past (good) results. This is not always possible. We need to find and evaluate contractors. That due diligence process is best realized once we know the main characteristics of the house. For example, most Colombian houses are built with bricks and contractors usually do not work with subs specialized in steel work. Selecting early in the design process a contractor with a sterling reputation in building brick homes would have been a waste of time.

    2) In my experience, in boom periods (certainly the case where we live, not precisely true for the US from what I read), contractors are busy and thus not willing to spend time helping with design matters, unless they are guaranteed the job afterwards. We tried to involve a contractor early on in the project but couldn’t guarantee he would get the contract. He promised a lot of advice and delivered few. This is fair enough, especially since many projects are abandoned during the design phase.

    3) Contractors have their preferred subs that they work with, which could be anywhere on a price/quality chart. During a first contact with a contractor, it’s hard to determine whether we’re dealing with someone who devotes time and attention to select high quality subs that are reasonably priced, or goes for the best subs in the business, be damned whether they charge a premium. We want to select a contractor that fits the profile of our project (i.e. quality with no extra bells and whistles).

    Based on the above, we’re implementing a hybrid contractor selection model:

    a) We’re pre-selecting 3 or 4 contractors and have showed them the information available about our project, to make sure they are interested. We have reviewed their portfolio of projects to validate that the construction techniques they used match what we have in our design.

    b) Our architect is preparing a detailed set of plans including an estimated bill of materials. We have spent over a year in the design and are trying to make sure it is as thorough and complete as possible.

    c) Once the design is complete, we’ll share it with the pre-selected contractors and will ask them to show us some completed and under construction projects. That will be their and our opportunity to see whether we want to work together. We’ll also interview existing clients.

    d) Following that due diligence, we’ll ask each contractor to submit a standardized bid for our project, letting them know in advance that the contract model will be Cost Plus (what in Spanish is called “administracion delegada”). What we want to know is whether we’re dealing with a contractor who knows his job or not. For example, we already have a good idea what our green roof will cost, and any contractor bidding a much higher / lower price would raise a red flag.

    e) We’ll review the bids and make our choice.

    f) The construction process will kick off, on a Cost Plus model, with the winning contractor. He’ll manage his subs and submit requests for funds as well as present receipts for expenses in complete transparency. He’ll negotiate discounts with providers, passing along any savings. For his work, the contractor would get a typical 15% administration fee calculated on the project costs.

    That’s mostly theory so far, rooted in a market that is probably significantly different from yours, Bob. All contractors very heavily lobbied for a Cost Plus contract – it’s their clear preference. Having seen houses completed under Cost Plus and other types of contracts, Cost Plus seems to deliver superior quality, while any owner-managed construction yielded Frankenstein-type results.

    Kind Regards,

    Serge

  • Artecohome

    Built our Texas Modern (Austin architects) two years ago. As homeowner we formed our own building company in order to facilitate the construction loan and control the process. Since architects were not local and not able to be on site, we hired a contractor to supervise, obtain subcontractors, and attend to schedules. We paid all subs through our construction company, assisted in supervision (two eyes are better than one), and stayed connected to the project daily. This was wonderful, but very time consuming. My wife and I have built several homes and she has quite a bit of construction knowledge which made this possible. Couldn’t agree more with the cost plus method. Down side is that when building a home with local sourced, energy efficient goals, the contractor supervisor had better know his subs well and be flexible with finding alternatives. The project took two years from completed architect plans to final move in. For a 3500 square foot home, this took a lot of patience and not a good idea for everyone. Would I do it again the same way? Yes, absolutely, but I would be very careful in picking the construction supervisor (contractor).

    • http://www.lifeofanarchitect.com Bob Borson

      As I was reading your comment, I was thinking in my head “Wow, that would require a considerable amount of time for them” … and then you wrote that it was time consuming! It’s very impressive that you took this path, I can only think that it took a tremendous amount of faith in your abilities – both raw problem solving skills and that you would be able to find and dedicate the amount of time to manage your own project. Is it safe to assume that that’s part of the reason it took two years to build a 3,500 house? (I hope that didn’t come across nasty, I didn’t intend it to be).

      Most of the projects we work on have full time on-site supervision – partly because I get to work on homes where the scope and expense justify that sort of commitment from the GC, and partly because the required level of coordination and execution demand that sort of on-going daily attention. It’s clearly a function of the budget but it’s hard to argue with the results of having a common point source available 100% of the time when people are on site building.

      Glad to hear the process was so rewarding – I love to hear it when people finish the construction of their home and don’t fall into that group of folks that only have horror stories to share.

      Cheers

      • Artecohome

        Thanks Bob. I always enjoy your posts. Not being an architect, but having worked with several over the years, I have gained a tremendous respect for you guys. To take a program, a piece of land, two want-to-be homeowners who usually have no clue what they want or need, city and national building codes, mechanical and structural limitations, financial constraints and be able to envision an aesthetic structure is truly remarkable and a testament to the human spirit. And yes it is safe to assume that the long time it took us to build was due to our in ability to be on site the whole time. But we were very very attentive to details and we had what I would consider some of the most professional and skilled subs available. A large part of the time spent was vetting the subs, which as I’m sure you know meant traveling to visit their previous work and talking to builders and architects in our area. But the house is very well done with few regrets and to a standard we could have only hoped for. Every day I wake up and look around me and think what a wonderful talent we found in our architects.

  • http://DavinciRemodeling.net/ Paul Coates

    Both posts are excellent Bob! To add one other disadvantage to the “Bidding”
    process: many of the best general contractors have a steady stream of work and
    are not interested in playing the bidding game (a game usually played without
    pay for the 2 – 3 weeks of work to develop our bid).

    If many of the best refuse to play – who’s left playing? Those who are playing are usually good at bidding – not necessarily good at delivering the services needed.

    Paul

    • http://www.lifeofanarchitect.com Bob Borson

      That is an excellent point – one that I didn’t get into. Many of the very best contractors that I am fortunate to work with have stopped bidding work altogether … AND they have a waiting list of people who are willing to wait and pay them their fees to use them. Shouldn’t that be telling us something??

  • William J. Martin

    Very thorough and nicely done ! However, your post does not address the negatives of this contract form for the client … I have worked with both contract forms and I prefer the competitive bid contract form. With hundreds of successful projects done this way, my clients consistently prefer competitive bid and only in very rare cases has an adversarial situation developed. Perhaps this is a regional difference, I am in the Northeast US. btw, I am a big fan of your blog, you have great insights !

    • http://www.lifeofanarchitect.com Bob Borson

      Thanks William! I would love to hear your take on the negatives to the Cost Plus – I haven’t experienced any myself (at least none that are intrinsic to this type of contract) and since I try to keep things inside my personal bubble of experience, I was trying to see the down side to the client. All I could come up with was if the architect and contractor were overly focused on protecting one another from on-site mistakes – and since I view that as borderline criminal activity, I didn’t think it was specific to this contract type. What has your experience been?

      • William J. Martin

        Call me Bill … I am no “prince” … I preface this by saying this could be a regional difference … As I see it, the big difference between a cost-plus contract and a competitive bid contract is that it shifts the financial risk to the client. Cost-plus contractors will generally not commit to a fixed construction cost, nor will they commit to a fixed timeline for construction. My clients overwhelmingly want to be able to plan financially for a fixed construction cost and fixed timeline.

        At the request of some clients, I have bid the project out competitive bid and also sought cost-plus contracts for direct comparison to eachother. The cost-plus contractors came back with longer construction timelines and higher construction cost “estimates” as compared to the competitive bid contractors. (Cost-plus contractors did not know about the other bidders) Keep in mind that these are fully specified plans including finishes, moldings, fixtures, etc.. I have found that clients do not want the risk and uncertainty not having a fixed price and fixed timeline… at least not in this region…

        • Mark Mc Swain

          That makes sense to me, in that DD/SD/CD design-competitive bid-build is not that much different from DD/SD/CD design, cost+ bid-build.
          I cannot speak to Bob’s experience, but, in my own, using DD~SD Cost+ Bid CD-build can achieve some very good effect.

          This is distinct from “pure” Design-Build, which is DD (bid/price) SD (bid/price) CD (execute contracts). Which can be just a bit more informed as a process–but requires either extraordinary transparency between parties, or being all “in house’ together.

        • http://DavinciRemodeling.net/ Paul Coates

          Bill, you bring up some important points. But we may be confusing the terms “bidding”, “fixed price” and “Cost+”. As a GC, I’m happy to offer a “Fixed Price” or a “Cost+” agreement to the customer. What I’m unwilling to do is participate in the “bidding process” to arrive at a “Fixed Price Agreement”.

          Your point about “risk” is right on the money. When we present a proposal for a project, we present it as Cost+ with the option of converting it to a “Fixed Price” agreement. The fixed price is the estimated cost in my Cost+ proposal PLUS XX% (based on the estimated risk involved). In Cost+ the customer is at risk (also potentially in a win position if the project comes in under budget). With a Fixed Price agreement, I’m at risk.

          Regarding commitments to cost and timeline, there are other factors to be considered. Consider the GC’s abilities to play nice with the team, to communicate well, to solve problems, to deliver the end result as imagined and designed, to be flexible and to make the building experience as positive as possible. Unfortunately, fixed price agreements (whether their arrived at by bidding or not) do not lend themselves to these additional items. Fixed price agreements (produced by the bidding process) are in direct conflict with these items.

          It’s interesting that in your “estimating” experiments pitting
          Cost+ and Fixed Price proposals head-to-head, Cost+ was higher. Based on the way we think about the risk factor, I would have assumed just the opposite. I guess you would have had to build both ways to see the actual results vs. the estimates. It’s also possible that Cost+ GCs are accounting for all the additional factors they expect to bring to the project, while a fixed price GC plans to just do his job for his pay.

          Regarding your point about clients not wanting uncertainty
          in cost and timeline, I have found that (when given the option) they seem to split about 90% for Cost+ and 10% for fixed price.

          You may be right that regional economics may be a force here.

      • Mark Mc Swain

        I’ve noticed that there can be “push back” from subs invovling the transparency of Cost+. Which is vexing, since most subcontracts are executed as (T & M = cost) plus a fee–so, it’s a misunderstanding of terms.
        From the GC side, there can be “push back” in that they will have had experience of people thinking “cost plus” means “exact price of materials and labor with no mark-up at all, and maybe a 1-2% ‘tip’ at the end, if we’re happy–and we won’t be.”

        This can make them shy. GCs who have settled into a CM-at-risk model will not want a strict cost-pluss contract, but, that’s grist for a different post.

  • http://www.decorgirl.net Lisa M Smith

    Excellent post Bob! In my world (design) cost plus seems to be the most popular and a characteristic of a successful project. When people get into bidding, though I still tell people they have to start with a Scope of Work for any contractor they want to entertain a price from, cost+ is the fair and honest way to price a project. People invariably will pic the lowest price if given the choice. Cost plus is the fairest way for both the contractor and the homeowner. “Teamwork” is the hallmark of a successful project. Cost plus keeps the guessing game out of it and the assumption someone is trying to screw over someone else out of the picture.

    • http://www.lifeofanarchitect.com Bob Borson

      Thanks Lisa!
      As long as everyone respects what the other is bringing to the table, this process is almost always a smashing success. It’s when people start creeping outside their scope that collaboration starts to break down as people start to “protect their turf.” But that situation isn’t specific to this sort of cost model but rather the dynamics of a multi-headed team made contractor, owner, architect and/or design professionals.

  • http://blog.SLS-Construction.com/ SLS Construction

    I like your system as that is the way it should be done – teamwork & advanced planning. It is amazing how many architects wont bring builders in from the start (and the trades) & it tends to lead to more problems & less creative solutions. This is getting to be more imperative when one starts building high performance homes.
    I must also forewarn others there are a few other takes & ways of doing Cost+ & it isn’t always pretty – though a lot depends on who the players are

    • http://www.lifeofanarchitect.com Bob Borson

      This system has worked extremely well for me and I just assumed it was the format and not specifically my way of handling the process. More and more people have been writing in saying that this process sounds great but it wasn’t how there cost plus process was handled both in terms of processing paperwork and the collaboration between the interested parties. It may seem out of sorts but I like to think if I am recognized as the design professional by the contractor, and they are recognized as the construction professional by the architect – and both allow the other to provide input on how they think things should be done in their areas of expertise – that things go really smoothly … and every client recognizes it.

      • http://blog.SLS-Construction.com/ SLS Construction

        And therein lies the issue – there are some great Archi’s out there, just like a lot of good contractors – the catch is most of the times we only see, hear & remember our dealings with the bad ones.
        What you wrote is how things should work, unfortunately not everyone sees it that way. Big kudos on both pieces Bob as you pretty much nailed it how it should be

      • Selh05

        Hi Bob,
        I certainly wish you were in NC as we are in the middle of a cost plus fiasco. We hired a Design build team with 1 owner being the architect. They are charging cost plus 25% here. This was known to be a reputable firm but they have not managed their subs and the labor hours have far exceeded what they should be for a fireplace remodel and bar area. We are getting invoices with no hours, the crew leaving for large amounts of time to work on the firms other projects. We had a scope of work and good faith estimates for cabinetry, electrical, plumbing, etc. So far everything is significantly over budget (ex: $6500 estimate for cabinetry and not one bid has come in under $12000). We also had a good faith estimate of $29,000 and the project will end up being closer to $40,000. This was simply adding walls for a new bar and building out the fireplace with bookcases. It was supposed to be a small project. I could build a small house for this price!

        • http://www.lifeofanarchitect.com Bob Borson

          It breaks my heart to hear stories like this. On all my projects – even the cost plus projects – there is a bid budget that is prepared before any work is actually undertaken. For example, the $6,500 estimate wouldn’t be an estimate, someone would have bid to do that work already so these sorts of surprises don’t happen.

          I am not a big fan of the design-build process for the simple reason that there isn’t a checks and balances process in place to make sure that the owners best interests are represented along the way.

          Sorry to hear this isn’t going well, this should be a period of excitement and anticipation, not dread and anger.