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  • Writer's pictureCornerstone Homes TC

What is a Cost-Plus Contract?

Building a new custom home is an exciting and rewarding experience, but it can also be a costly one. For homeowners who want to ensure that they stay within their budget while still getting the home of their dreams, a cost-plus contract can be an excellent option. Let's explore why cost-plus contracts are beneficial to homeowners when building new custom homes.

What is a cost-plus contract?

First, let's define what a cost-plus contract is. A cost-plus contract is a type of construction contract where the builder is paid for their actual costs plus a predetermined percentage markup. This means that the homeowner pays the builder for the actual cost of labor, materials, and other expenses incurred during the construction process, plus an additional amount to cover the builder's overhead and profit.

The primary alternative to a cost-plus contract is a fixed-price contract. A fixed-price construction contract is a type of construction contract in which the contractor agrees to complete a project for a set price. This means that the contractor is responsible for completing the project within the agreed-upon budget, regardless of any unforeseen expenses or changes in the scope of the project. The contract typically specifies the exact scope of work, materials, and other details of the project, and the price is based on these specifications.

Project costs are an open book

One of the main benefits of a cost-plus contract for homeowners is transparency. With a cost-plus contract, the homeowner knows exactly what they are paying for and can see the actual cost of every aspect of the construction process. This transparency can help prevent surprises and allow the homeowner to make informed decisions about where to allocate their budget.

Adjust to changing design needs

Another benefit of a cost-plus contract is flexibility. With a fixed-price contract, the homeowner may be locked into certain design decisions or materials that were agreed upon at the outset of the project. With a cost-plus contract, the homeowner has more flexibility to make changes or adjustments as the project progresses without incurring significant additional costs.

Cost-Plus costs less?

According to the Association of Professional Builders Annual Report 2023, builders charge and make higher margins when using a fixed-price contract compared to a cost-plus contract. Building, as in all businesses, is about pricing risk - so builders with fixed-price contracts build escalation clauses, large contingencies, and a larger margin/markup into the price to ensure that if they incur unanticipated costs they are covered.

Fixed-price contracts promote builder cost-cutting

Finally, a cost-plus contract can be a good option for homeowners who want to work with an experienced builder who uses high-quality materials and labor. Since the builder is paid for their actual costs plus a predetermined markup, there is no incentive to cut corners or use inferior materials to save costs (and increase their profit). This can help ensure that the final product is of high quality and built to last.

In conclusion, a cost-plus contract can be a beneficial option for homeowners who are building new custom homes. With transparency, flexibility, and incentives for both parties to complete the project efficiently and effectively, a cost-plus contract can help ensure that the final product is of high quality and meets the homeowner's budget and design goals.

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