Types of Building Contracts
Select the Right Home Builder and Residential Construction Contract for You:
The job typically goes to one of the bidder's after a competitive bidding process. Fixed–price contracts require complete construction documents, which can cost approximately 5% of the total price of the project. Unfortunately, if the bids received are too high, some firms are unsure where to change the plans in order to reduce the project price.
Tip: Having a Contractor involved early in the design phase can aid in the process of designing a home within your desired budget. Selecting a contractor based on price alone, instead of reputation and quality work, can lead to an unhappy working relationship and unsatisfied Client.
In addition, beware of contractors who add a high profit to their cost estimate in order to cover the risk they carry under a fixed-price contract. In addition, beware of contractors who follow the standard practice of charging double the cost for any change orders requested after their initial bid has been accepted.
Advantage: If no change orders are requested throughout the project, the Client knows the exact cost of the home upfront.
Time and Materials Bids (T&M) or Cost-Plus Contract
In this case, the Home builder provides the Client with a rough estimate for the cost of time and materials required to complete the project. The Client then pays an hourly wage for the contractor’s workers. The cost of materials purchased for the home are given a contractors discount pricing. Both of these are added together and an agreed upon percentage is paid by the Client on the job as a whole.
Tip: If you decide to go with a Cost-Plus Contract, do not choose a Contractor based on the initial price estimate alone. Simply put, the Contractor is not obligated to adhere to the provided rough estimate under this form of contract. Therefore, this form of contract works best when the Client holds a trusting and good working relationship with a reputable builder.
Advantage: This form of contract allows the Client the flexibility to change their mind throughout the building process and ensures the Client gets a home they are completely happy with, right down to every last detail. The contractor does not have to add a "fear factor" in their price because it is not fixed. In addition, this contract allows for a mutually fair and open working relationship.
Cost-Plus a Fee
Under this form of contract the project cost is very transparent. Specifically, the total project cost includes the cost of time and materials, without a markup; plus a set fee for overhead and profit.
Because the fee is an agreed upon dollar amount, as opposed to a percentage, the Contractor does not benefit from an increase in cost for time or materials. If the project takes longer to complete due to changes in the plans, the Client simply pays for the extra time; but the overall project fee remains the same.
Tip: Be sure to start with an accurate estimate for time and materials, as well as a reasonable fee given your type of project. Estimating a project with incomplete documents can lead to significant changes in the plans, which should be avoided in order to remain close to the original cost estimate.
Advantage: This form of contract allows the Client the flexibility to change their mind throughout the building process and ensures the Client gets a home they are completely happy with, right down to every last detail. In addition, this contract allows for a mutually fair and open working relationship.