There are two types of contracts when working with a contractor – “cost-plus” or “fixed-price”. Under cost-plus, you pay the contractor for the cost of materials and labor plus a commission to cover his compensation – typically 20% but it can range anywhere from less than 10% to over 25%. Of course both parties work to a pre-determined budget so you have a pretty good idea of what the total job will cost. With a fixed-price contract, you pay a set amount and it’s up to the contractor to make it work – if he’s over budget, it comes out of his pocket and the more money he saves, the more he makes – you pay the same either way.
A recent article in the Los Angeles Times Sunday Real Estate section [“Digging – It’s Your Job” 7/13/08] suggested always negotiating a “fixed-price” contract, never a “cost-plus”. Their reasoning was that it left it up to the contractor to lose money or turn a profit. I couldn’t disagree more. What contractor is going to choose to lose money?
I always work on a cost-plus basis and here’s why. I want to know what I’m paying for, and I want control over my budget. The estimated cost of the project is just that – an estimate. Every job is full of surprises and budgets need to be flexible. You never know what you’re going to find when you’re opening walls or removing flooring. No contractor is going to want to lose money and with a fixed-price contract, he’ll do everything possible to cut corners including using inferior materials or skipping important steps to maximize his profit.
If you want to know exactly what you’re paying for what, negotiate a cost-plus contract within a set budget and insist on detailed invoices with back-up. My contractor’s invoices generally have up to five or more pages of Excel spreadsheet showing over 200 or more line items detailing what’s being billed against the original estimate. Changes to the original estimate are discussed in advance, solutions worked out between us and billed separately as a change order.
The only time I might make an exception and opt for a fixed-price contract would be for a small job like a closet make-over, a bathroom remodel or maybe even a kitchen – but never for a major house remodel.