Q&A
What is “Cost-Plus”?
Construction contracts are typically structured in one of two ways; Fixed-Sum or Cost-Plus. A Cost-Plus contract is “open book”. The client sees all of the construction costs for the project and is invoiced accordingly. In addition (the ‘Plus’ part), the client pays the contractor a fee for managing the construction process. The Cost-Plus method can be used on any size project but is usually more cost-effective as the size of the project grows.
What is meant by “cost”?
Cost is what I, as a contractor, would pay for materials, subcontractors, etc. The invoices I see would be the same invoices that you would see. There is no difference between my cost and your cost. Costs for labor and materials are determined through a competitive bid process. Bids are awarded based on price AND QUALITY.
What does “plus” mean?
As mentioned, the “plus” is my fee for managing your project. The fee is paid to me by you, the client, periodically throughout the course of construction. Some contractors determine the fee as a percentage of the construction costs, some as a fixed amount. I use the fixed-amount approach. My total fee is determined by the scope of the project. Every custom project is, of course, different so my fee may vary from one project to another. Barring any major changes in the scope of a given project, my fee does not change during the construction process.
Is there a budget?
Yes, always. I will not start a project without a budget.
Before the construction process is started, sometimes even before the design is finalized, a budget is created. The more detailed the Architectural Drawings, Specifications and Scope of Work are, the more accurate the budget will be. An accurate budget can minimize “surprises” later in the construction process. As the work progresses, the construction costs are compared to the budget (weekly is best) to determine if the project is heading in the right direction.
What is the payment process?
There are two options for payment.
One option: Using the budget and the scope of the project as baselines, I create a Payment Schedule. The schedule is comprised of a deposit and six to 12 additional payments, depending on the size of the project. Each payment is tied to the completion of a specific phase of construction. As the project progresses, the actual amount of a payment may vary from the original Payment Schedule depending on how the actual costs compare to the budget. After I receive payment from you I then distribute funds to the subcontractors and suppliers as needed.
A second option: Payments to subcontractors and suppliers are made directly by you. I determine for you if and when these payments are justified. As with Option One, I still track the costs and provide a summary of how the project is progressing relative to the budget. In addition to paying the subs and suppliers, you would also pay me on a bi-weekly retainer basis.
I prefer and recommend the second option. It does make for a little more work for you, the client, but it also keeps you immediately engaged and informed of the cash flow and the actual budget. Knowing when and where your money is going is never a bad thing.
But the choice of payment options would be yours. I can work with either approach.
Mike Heslin
Cost-Plus Builders
