Renovation Education: The Benefits of the Cost Plus Fee Contract

Renovation Education: The Benefits of the Cost Plus Fee Contract

Can you tell I’m biased?

Continuing from my previous post on the typical types of agreements between contractor and owner is the alternative to the Lump Sum Contract, The Cost Plus Fee Contract.

This type of contract is becoming more prevalent these days in NYC residential renovation and remodeling projects because it involves the contractor at an earlier stage of the process in order to provide budget pricing for the anticipated work, creates a more collaborative spirit among everyone involved, and makes all of the costs involved in the actual construction more transparent.

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Bob says it better, and in more detail. He’s also a proponent of the Cost Plus Fee Contract. In both of our experiences, this type of arrangement has resulted in better projects that meet the goals of everyone involved.

Read on and let me know if you have an opinion and any experience with either or both arrangements.

Here’s an excerpt from Bob’s post:

Residential Construction Contracts: Cost Plus Fee

Bob Borson —  August 9, 2013

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.

To read more about Bob’s take on this type of contract, please see his full post here.

Questions? Let’s discuss.

~RJ