A Primer on Contracts

Good morning friends!

Today I would like to dive into another aspect of who we are and how we do business. Today we will tackle the contract. There are two main types of contracts in the home building industry. 1) Fixed price and 2) Cost-plus contract. I want to briefly describe each and then go through an introductory comparison.

Fixed price contract refers to the type of contract where a specific scope is laid out and a final price is attached. For example your Netflix account is a fixed price for a defined service. In return for mindlessly wasting an evening, you pay Netflix $10/month. These contracts are great for simple transactions as they are straight forward and simple.

Cost-plus contracts refer to a type of contract where you are charged hard (jobs directly associated to the site like labour, materials, clean-up etc) costs, plus a fee on top of that to cover profit margin. In a way hourly labour is a cost-plus scenario. There is an agreed upon rate with an employer that varies month to month based on actual time spent. The cost-plus mentality is the basis to the fixed price contract, in that fixed price contracts are an estimated cost with a desired profit on top but usually include a margin for risk factor.

While the majority in our industry use a fixed price contract we believe it is worth considering a cost-plus contract from a home-owners perspective for a number of reasons. 1) It creates an attitude of teamwork. Contractor, home owner and all other parties are working together from the start. There’s an attitude of camaraderie as the team works to establish scope and budget. 2) Cutting corners is not rewarded. Cost-plus contracts typically lead to higher quality houses. 3) Job morale is typically higher because the contractor knows he’s getting fairly compensated for his time and energy.

If you do proceed with a cost-plus contract it is important to have some things clearly laid out as there is also some danger to the contract. 1) Firstly make sure they have experience in the industry they are bidding on. This ensures their estimates are more accurate and you’re protected against bad estimating. Typically if you see an estimating template that is a good thing, as it indicates systematic attention to detail. 2) Talk to your contractor about the mark-up. Clearly discuss with the contractor what he’s expecting to spend in indirect costs such as overhead, project management, office costs etc., and what he’s hoping to make as a company. Cost-plus contracts are very transparent and honest which stands to benefit both sides if handled correctly. 3) Finally, ensure the quote you’re getting is for what you want, not the cheapest options. This helps protect you from scope creep and unfair mark-up on “extras”. When comparing a cost-plus estimate to a fixed price quote it is very important to know exactly what the scope includes.

If you’re thinking of building a house, please come talk to us at Dueck Homes. Whether it’s an energy efficient retrofit, a luxury home on the river, or a sustainable home to raise a family in, we want to talk to you and help make your dreams become reality! We’ll gladly explain more of who we are and why we do what we do!

Shalom,

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