Getting bids from a contractor to do any kind of residential remodeling work or even new construction can be a daunting task. As a homeowner, you should be aware of the different methods contractors use when determining the price in their bids. The method used can cause the overall cost to vary considerably. It is up to you to choose which method you are most comfortable having the contractor use on your project. Let’s discuss the three most common used methods.
Contract Method:
A bid using the contract method should be a guaranteed price contract between the owner and the contractor for the cost of the project. This should be a total cost not to exceed the written price in the contract and is considered a Turn Key Project. It is not an open ended contract and the price should not change once the contract has been signed unless it is modified by written change orders signed by both the owner and contractor.
Pros:
- Owner knows the entire cost of the project before the work is done.
- Owner knows the beginning and approximate ending date of the project.
- All changes in price require written change orders signed by owner and contractor.
Cons:
- Owner is locked into the contract. The contractor runs the job and the owner has no flexibility to make changes to the scope, quality, or subcontractors used in the project.
- Depending on the language in the contract, if the owner is not satisfied with the contractor or the contractor is doing a bad job, a legal remedy may be required to fire the contractor.
The Contract Method is probably the most widely used for bidding projects. It places all of the responsibility for an exact bid on materials and labor on the contractor. The contractor oversees his crews to stay within the time allotted for the completion of the project. Should the crews take more time, the contractor loses money. This helps guarantee the completion date of the project. The owner is usually given an Allowance for fixtures, cabinetry, countertops, flooring, appliances, paint color, and whatever else the owner needs to pick for the project. If the owner chooses something priced over the allowance priced in the bid, the owner will be responsible for paying the difference. It is hard for a contractor to bid on installing a faucet for $200 when the owner really wants one costing $750.
Cost Plus Method:
A bid using the Cost Plus Method is a contract between the owner and the contractor where the contractor agrees to do the work for cost of the materials and labor plus an agreed upon percentage as a means of paying for his expertise and allowing him to make a profit. This percentage is called the contractor’s margin and is negotiable in the contract and should be put in writing before any work begins. Depending on the scope of the work, the margin usually runs from 10% to 50% or more.
Pros:
- The owner is the Boss. The owner is in charge of making decisions and changes on the project.
- The owner gets to see all bills and invoices if it is agreed to in the contract.
- The owner gets to know the suppliers and subcontractors. If a good relationship is built, return work and warranty work is usually easier to get done.
Cons:
- The total cost of the project is open ended.
- The timeline for completion gives no sense of urgency to finish the project. The more the project costs, the more the contractor makes. He has no incentive to control cost increases or changes to the scope of work.
There are many things to consider before signing a Cost Plus Contract and unfortunately, the average homeowner is at a disadvantage about what to ask for in the contract. By reading this far, you have proved yourself above average. Here is a list of some of the things to consider.
- If the owner purchases items for the project, does the contractor add his margin on these items or are they considered outside the scope of the contract?
- What is considered cost? Does the contractor consider only items used on the project as cost, or does he consider his salary, fuel, truck, supervisor, secretary, electricity for his office, etc. as cost also?
- How often is the contractor going to require pay draws on the job and what type of documentation is required for each draw?
- Is the contractor required to provide copies of all invoices and receipts to the owner?
Cost Plus bids usually have a very rough estimate of the total cost. It almost never gives a guaranteed final price and bypasses the formality of Change Orders. Any changes made by the owner can add up to some major cost overruns due to the open ended nature of the contract. The owner will need to keep an extremely close eye on all expenses.
Construction Management Method:
A bid using the Construction Management Method is where the project owner and the contractor agree to a monthly fee for the management of the project. This is usually a flat monthly fee paid by the owner to the contractor for him to act as a manager overseeing the project. All costs involved in the project are paid directly by the owner and NOT by the project manager. This allows the owner much flexibility in design, timing, material selections, etc.
Pros:
- The owner is in complete control. They get to see and manage payment of all cost which ensures all bills are paid and no liens can be filed against the project.
- The owner gets to know the suppliers and subcontractors. If a good relationship is built, return work and warranty work is usually easier to get done.
Cons:
- The total Cost of the project is open ended.
- The timeline and total cost for completion is totally open ended. The longer the project lasts, the more the manager makes, therefore, he has no incentive to complete it quickly.
- The owner really acts as the contractor and must become involved in setting up charge accounts with suppliers and subcontractors. This means strong credit lines needed and time to call and meet with suppliers.
- Permits for the project can be pulled in the name of the manager if he is a licensed contractor, if not, the owner will need to get licensed and get the proper permits.
- If the owner and manager get cross with each other, the manager may authorize work or purchases not known to the owner. Surprise bills might show up during the project or after the manager is gone. Remember, the manager has no real stake in saving you money.
Snapshot Analysis
Any project whether it is a simple bathroom remodel or a complete new build can be very stressful. Not everyone is capable of handling the risk involved in Cost Plus or Construction Management but if you have done a good job of pre-qualifying your contractor or manager, these methods will work best for you. However, if you need a locked in guaranteed price, you should go with a Turn Key fixed contract bid. Take the time to work out every detail so nothing is left to chance. Change Orders add up in a hurry and before you know it, you owe several thousand dollars more than you expect. Any good contractor will work to get the fine details in place before work begins.
