Cost +, not to exceed or Lump Sum Contract?

phoggieApril 24, 2012

Some of you have graciously followed my saga of selling/buying/or building since my DH passed away NYE and I am back, with a question of many more to follow, I am sure.

I did sell my 4090 SF home and plan to close May 16...and the buyers have been so good to work with and assured me that nothing will stop them from buying this house...they do not have to get a loan.

After having a condo sold out from under me, when I asked for a mold inspection, nothing has come up "back home" to buy or rent, so I am back to the building mode. And as my good fortune, the Amish crew that DH and I had originally talked to about building for us, had their "late Aug.-early Sept." build not be able to get their financing and he said he could slip me in that slot and have me in by Christmas.

I have to keep it modest and watch what I do, and it will be in the 1500-1600 SF range, but is it if DH is looking down "speaking" to me.

Now for my question. I trust these builders completely...we have inspected their work in the past and they have a wonderful reputation for their work and committment. What kind of a contract is more to my advantage?...Cost +, not to exceed $---, or a Lump Sum Contract? Pros and Cons of both will be appreciated.

This is a huge step for an old woman, but since our lot on the little lake never sold, this seems to be another "sign" on what I should do. A former classmate who has just lost her second husband too, has graciously invited me to live with her until my build is complete....UNLESS something ready built comes up very soon~~

Thanks for all your help and I am sure I will be back asking more....this is hard to do by myself, but DH was an architect/contractor and I have been around construction quite a bit....but not on the "paying" side of it.

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Great question phoggie & best of luck for your next phase in life!
That said, our main goal was to cap our upside cost & control everything we could ahead of time & below that cap.

So everything was spelled out during the negotiation.

When building a bespoke house, we are fully cognizant that any changes would come @ a cost (change orders + materials) once the plans are signed off & walls have gone up.

Therefore, we chose to negotiate a price with our builder as though we are buying a spec/tract home ie final all encompassing price.

We know what the cap will be & that everything was laid out.
A lot of work to prep & educate ourselves on every screw, handle, light fixture etc. cost.

But we are people who work in risk management by profession so this type of pre-work is the norm.

Anyhow, that is our thought process & I hope you get a few more perspective to make your decision making easier!

    Bookmark   April 24, 2012 at 9:34PM
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Hi Phoggie!

My DH and I did a cost plus with our builder and it was very organized and no surprises. He got prices on almost everything before we started and we settled on some things to be purchased by ourselves, like light fixtures. At the end of our build we came in under budget! Of course, the excavation of the property went over budget but the house itself did not. We had a construction loan and we worked out a schedule with the builder on the draws which the credit union approved. Another thing, we had "meetings" every Mon. morning with our builder since we lived on site it was easy to meet with him and it really helped with communication.
So glad you have a plan to build and the support of a friend to stay with too!

    Bookmark   April 26, 2012 at 1:31AM
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Phoggie _ I dug up some short articles for you to consider:

Article1 - Case for Fixed Cost

* A Cost plus % = the pricing of the work is uncompetitive with no incentive to control costs.
* With the Fixed Price (or the Cost plus a Fixed Fee), builder is NOT motivated to increase the total cost of components

Article2 - A Case for Cost +"

* A fixed price - the builder must overestimate each line item budget to cover possible cost overruns on them.
* In Fixed (guaranteed) Price contract, the builder does NOT disclose their fee nor provide actual invoiced amounts from sub-contractors to you.
* In a Cost Plus Fee contract, You pay actual itemized amounts - however cost over-runs are expected but so are savings to negate those

Article3 - A case against: Cost Plus Fee, Cost Plus Fee Cap"

* No matter how deep the pockets, clients do not fully understand nor accept the concept of additional cost & contingencies.

    Bookmark   April 26, 2012 at 10:17AM
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Phoggie- I have no idea about the costs, but I wanted to say congratulations on getting the Amish builders! Your husband does seem to be watching over you :)

    Bookmark   April 26, 2012 at 1:54PM
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Sophie Wheeler

If what you want is modest, and without too many specialty componets, then I would personally choose a fixed fee. Being easily pleased with a wide variety of potential choices means that you will have something that works for you without too much research on your part. If you are someone that has to go to every showroom within a 150 mile radius to sit in the tubs and wade through 200 choices for the exact perfect 66" whirlpool tub in the exact right color that will match the perfect stone that you're building the whole bathroom around, then I would probably suggest doing a cost plus. The research for these specialty choices will be on you though, unless you get a designer involved to help you with the gazillions of decisions. And your wallet will bear the cost of your taste, but you will have everything exactly how you want it to be.

    Bookmark   April 26, 2012 at 5:47PM
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We walked through a house last year that was a cost + not to exceed______. The builder ran out of money before the house was totally finished. They ended up putting up plywood in the ceiling of the wrap-around porch--which was badly sagging and only a year or two old. There were some other shortcuts taken at the end.

No matter what, you need to watch things carefully and keep an eye on costs. Know your options and keep a pulse on everything.

    Bookmark   April 27, 2012 at 12:47AM
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"They ended up putting up plywood in the ceiling of the wrap-around porch--which was badly sagging and only a year or two old."

And easily corrected at a later time.

    Bookmark   April 27, 2012 at 11:43AM
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@ who's expense?

    Bookmark   April 27, 2012 at 1:18PM
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Many thanks to pbx2 for posting those much to think about.
I truly trust my Amish crew, but the contractor wants to use expensive I may have to ask ways that we can cut some of the costs.

I really miss DH at these times...since he was an architect/contractor and we "thought" he would be taking care of our new build and now I am left alone to do it by myself. He had planned to act as our GC in our new build and pick out and arrange for all materials that we used. He had many contractor contacts, so we could have saved a lot of money, but now he is gone and the business has closed.

All of your responses are appreciated, even if I do not understand them all. I get angry at the person who sold that condo right out from under me just because I asked for a mold inspection, and left me stuck with this decision to build. There is nothing there to buy and this house is sold, so I must find somewhere to live other than stay with my friend very long.

    Bookmark   April 28, 2012 at 11:55PM
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The best type of contract and the one used for many large projects to save time and money is Cost of the Work with a Fee, a GMP and a Shared Savings. Unfortunately, it requires more contract administration skills than is usually found on typical single family house projects.

    Bookmark   April 29, 2012 at 8:49PM
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Renovator, would you explain how that works, just in general terms? Sounds interesting even if it doesn't typically fit a single family model. Thanks!

    Bookmark   April 29, 2012 at 9:11PM
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Sure ... I assume you know how a Cost of the Work contract works and that a Guaranteed Maximum Price places a limit on how much the Owner will pay the GC. As an incentive to the GC to save money, if the GC is able to complete the project before hitting the GMP, the difference between the cost and the GMP is called the "Savings" and it is split between the Owner and the GC usually 60% owner and 40% GC. It is essentially a bonus to the GC for managing the project well. Because this bonus is added to the GC's expected and normal compensation and involves no additional overhead it is equivalent to a 100% profit and that is an incredibly powerful incentive.

    Bookmark   April 30, 2012 at 8:48AM
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Thanks for taking the time to explain it so well, Renovator! I appreciate it and have learned something today.

    Bookmark   April 30, 2012 at 11:52PM
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