Builder Contracts-Construction Contracts

Hi Carl, Thanks so much for having your blog and web sites. It looks like they’ve been helpful to many people.

We are in the process of finalizing drawings (with an architect) for a fairly huge remodel. We did things somewhat in reverse by finding a contractor we really liked, and had more of a “gentleman’s agreement” that we would use him if he was willing to work with the architects throughout the project and take over mid way through the construction document phase and finish things up (so we could use less architect fees).

Well, we are now to the part that he has given us a general bid. He works on a cost plus basis (cost plus 15%). I have some major concerns about his contract. His bid is very vague, and is broken down into “demolition, framing labor, painting, electricity, exterior doors, interior doors, etc.) but with no major details of what exactly the number includes. We have had discussion about how he has arrived at the numbers and based on the drawings, but no specifics.

Also, is it common for contractors to bid 15% cost plus of the labor? He also includes an “administrative fee” of $8/hr included in the hourly rate of the laborers which I don’t understand.

At this point, we haven’t signed anything, so I am seriously considering just getting some other bids given how competitive the market is, and the fact that his bid is still a little higher than we would like it. I do feel emotionally obligated to him since he’s been part of the project the whole way and thinks he has the job.

Any advice (about whether this cost plus methods seem typical and how to obtain bids, and possibly break it to him if we find a much better way to go) would be greatly helpful.
Jennifer

Hi Jennifer,

Liking your General Contractor is important. It would be advantageous for all if you could work the contract difficulties out.

A good residential construction contract can save you headaches and money.

Keep in mind that you, the homeowner, are in charge at all times in a build or remodel job… You are the captain of the ship.

A contract based on a percentage of cost is great for the builder but not you.
There is no incentive under this arrangement to keep costs down.

So, what you should tell him is you want a very detailed total cost breakdown of the project with allowances for items to be selected later and a new contract based on that total cost plus a fixed fee that covers all the duties of a General Contractor including the “Administrative” duties of looking after “laborers”.

Under NO circumstances should you ever have to worry about how many hours of labor you will end up paying for. I’ve always said, if you want to see how long a project can take and/or the most it could cost, hire labor by the hour.

Any part of any job can have the hours estimated in advance and a mutually agreeable price set.

He can adjust his percentage of total cost in anticipation of paying a bit more for contracted labor instead of hourly to compensate if he wants to, but then his fee is “cast in stone.”

I don’t think 15% is the least bit unreasonable. I wouldn’t do it for less.

The estimated total cost to build that your General Contractor comes up with is just that, an estimate.

The dollar allowances your General Contractor puts in the contract for items that are to be selected by you, i.e. flooring, tile, appliances cabinets, etc. have to be realistic.

It is your responsibility to be sure they are realistic by doing your own comparative shopping either online or in stores.

Accept NO allowances for items that are “per sq ft”, or some other obscurity. Accept them only If they have a total realistic dollar amount.

Finally, if you don’t like your General Contractor’s contract and he won’t change it, tell him, “Thanks for your help and by the way, do I owe you anything for your consulting time?”

Then, move forward on getting at least 3 competitive bids from General Contractors that are NOT on a cost plus a % basis and;

  • Have NO hourly wages as far as you are concerned.
  • Are very detailed as to the cost to build.
  • Are either a cost plus a FIXED FEE contract, or is a;
  • Contract Bid (Fixed Price) to Build (or Remodel) a House. That means the General Contractor gives you a firm total contract price for the entire project. (Note: Also called a
  • Fixed Price Contract to Build)

The Fixed Fee and the Fixed Price are the only two contracts I recommend to anyone who wants to use a General Contractor.

Summary:

 

A good home building contract can save you headaches and money.

 

  • A Fixed Price Contract will save you worry about cost overruns.
  • A Cost plus a Fixed Fee Contract could save you money but with more worries.
  • A Cost plus a Percentage will most likely be a disaster as the pricing of the work is uncompetitive with no incentive to control costs.
  • With the Fixed Price or the Cost plus a Fixed Fee, the builder is NOT motivated to increase the total cost of materials and/or labor.

Here are two Sample contracts (Scroll down past the 1st one) as well as sample “Specifications” (Description of Materials). These samples are in my book and are also on my “Getting Started” page.

They are merely samples. You should consult with a Real Estate attorney before using if for no other reason, state laws differ widely.

The description of Materials is by NO means inclusive of all the items you will be buying for your remodeling job. You and your General Contractor can make up your own list.

Added cautionary notes:

Have an attorney review any contract prior to it being signed.

Be sure your General Contractor is licensed and insured (see “Home Building – Subcontractor Insurance”).

Avoid deposits to your General Contractor! If one is necessary, keep it small…$1,000 or less. Larger deposits to stores for special order items may be required. If so, the deposit should be made with a credit card so that you will have refund protection.

Good luck & let me know how it works out,
Carl

Comments are closed.