Cost plus fixed fee with allowance

houses14January 27, 2014

The build says its cost plus his fixed fee. His proposal presented with a list of allowance. Should it be that way?

Would be greatly appreciate for your inputs!

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Well, have you picked out all of your products to be able to have a spec list to hand him about the products that you want to use? If you haven't picked out the products, then he has to use some numbers to come up with an estimate for you. The trick is to ask him what level of product that he typically uses as that is what he is probably basing the allowances on. Remember on cost plus, that the allowance is merely a guess. It will cost whatever you want it to cost. If you pick out $7 a square for hardwood, then that's what you pay. If you pick out $15 a square foot, then that's also what you pay. Only you know if you can stick within the budget given.

    Bookmark   January 27, 2014 at 1:02PM
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My understanding of a "cost plus fixed fee" owner-contractor agreement is that there's no maximum building expense stipulated in the agreement. The "cost" is whatever it costs to build what you have agreed to build, plus the contractor's fixed fee for all materials, products and labor that's s/he furnishes as part of the building contract.

Who selects subcontractors, materials and products? More importantly, who pays for them? In other words, who decides what the expenses will be?

This type of contract is appropriate if the scope of the work is unknown (or unknowable), and/or changing over time. It transfers all the contractor's risk to the owner. And it allows the contractor to control the building schedule and progress as s/he may choose.

Thus the owner must do a lot of early due diligence and spend a lot of regular, repetitive and timely contract administration each week in order to know what's taking place and the costs to date, projecting total expense at substantial occupancy.

If you pay the bills as presented by the contractor you have to decide if they are correct and appropriate before paying. If the contractor pays the bills and then invoices you after the fact, there's little you can manage after the fact.

Be sure you receive a Release of Liens at the end of construction, which certifies that the contractor has paid in full all subcontractors and suppliers.

Good luck on your project.

    Bookmark   January 27, 2014 at 1:20PM
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ditto what vc said but I would have the liens signed after each sub finished their work.

    Bookmark   January 27, 2014 at 10:26PM
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In a Cost of the Work contract the contractor normally provides the owner with a "Budget" that lists all of the elements of the project and their anticipated costs. I suspect the contractor is calling the Budget line items "Allowances" even though this term is commonly used for unspecified items in a Fixed Price contract. Essentially Allowance item = Budget item.

    Bookmark   January 27, 2014 at 11:05PM
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Thanks so much for all replies!

Renovator8, AI = BI , the technical term that what I was looking for.

Thank You !

    Bookmark   January 28, 2014 at 9:12AM
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As the work gets bought and performed the contractor should revise the Budget weekly to show the cost to date, how it relates to the original budget and what the estimated cost to finish is expected to be. If the contractor doesn't know how or is not willing to do that he should not be using this type of contract. It is not for contractors or owners inexperienced in project management.

    Bookmark   January 28, 2014 at 1:56PM
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I agree with Renovator8 with the above statement.

We did cost plus on our build and wish now we would have done some things differently.

I've been following a blogger and she did cost plus and is having a wonderful experience. It's in the link.

We did cost plus and it's been a poor experience. I don't know if our builder didn't really want to go that route and that's why it hasn't been good or if they are just inexperienced. They have gone WAY over budget on the estimated times and amounts for framing our house. Not sure if they would have controlled that better if it would have been a fixed price or it still would have been the same.

Here is a link that might be useful: Blogger w/cost plus agreement

This post was edited by neroselover on Tue, Jan 28, 14 at 19:26

    Bookmark   January 28, 2014 at 7:25PM
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Construction agreements are all about managing risk. Cost plus a fee puts all the risk on the owner. Fixed cost puts all the risk on the contractor (who will add a hidden contingency that the owner will never see to cover his perceived risk).

At the end of the day, building is really about finding an experienced and knowledgeable builder that one can trust and feel comfortable about his skill and budget management. With such a builder, the construction agreement will always work out reasonably, regardless of the type of agreement--so long as both parties entered into it positively and maintained a positive relationships thereafter.

Good luck on your project.

    Bookmark   January 28, 2014 at 10:24PM
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I did a large house addition with a Cost Plus contract and the builder resisted it from start to finish. In fact, at one point I had to threaten to quit the project to get the owner to stand up to him. I still had to nail some of the shear walls myself. He was a first class jerk.

Years later he ran into my partner and asked him to thank me because he had used that contract for many subsequent projects and had made a lot of money.

    Bookmark   January 30, 2014 at 6:51PM
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