Cost plus percentage or cost plus fixed?

Question

Hello BP,

We are getting ready to begin our first rehab.  It will be quite extensive (for us) as the property is in need of major renovation.  We are wondering what is the recommended payment method when dealing with a General Contractor?

Should we use cost plus 20 which he recommends, cost plus a fixed amount or is there a better way all together.  We have received a general breakdown of estimated costs but are concerned that we me be left holding the bag if he has underestimated.

Thank you,

Greg

Michael Boyer · Answer

Greg, I think I have a blog post on Cost Plus Pro's and Con's (and Fixed Price Pro's and Cons)... But there is more out there..

Think about alignment of interests (alot). Think about how the contractor stands to make more money as costs escalate ( potential issue with Cost Plus). That said, fixed price bids have issues, too, with incentives (to work faster, possibly using cheaper labor and materials)..

I actually am of the opinion there is room for both regimes--cost plus and fixed price. And, in fact, most fixed price agreements have some cost plus aspects (like for unforeseen aspects), and (my favorite) I like to put a not to exceed (or what you may hear called a cap or upset price) on any cost plus agreement (just can't write a blank check unless you have some major trust, ling term working relationship or other leverage in my opinion).. So the two can have aspects of each....

While I think it was written from the Contractor's perspective, I really like "The Contractor's Legal Kit" by Gary Ransone (but you may have to get it used, mine is old).

If you can get more bids, and even get some fixed price (which may not be something some firms do because they don't know what is behind the wall), I would do that for sure..... Screen, screen, screen.....check references, public records, reputation, past jobs, etc.... Do the detective work.

If you really like this contractor pushing the cost plus arrangement, just insist on a "not to exceed" amount clearly in the contract (have a contract/construction attorney) do this. If the contractor hits the roof, it is a red flag. Just tell him you can't expose yourself to uncapped costs. You can also draft a written change order procedure to exceed the amount, but it is not just "go for it" and send me the bill.

Also, I prefer the AIA (Am Architect Assoc) contracts and language for boilerplate, as it is more pro-client than the clauses general contractor's associations and attorneys draft. The payment schedule that retains your leverage will be in a good agreement, too, as mentioned above...

Greg Boney · Answer

Thank you.  Definitely great information provided and I appreciate all the help from the experienced folks here at bigger pockets.

Greg Boney · Answer

Thank you for the quick response! I may not have phrased my question correctly.  I understand to pay in installments as work is completed but what is a fair price for the GC, how should we determine his/her compensation?

Charlie Fitzgerald · Answer

@Chance Housos nailed it...

Chance Housos · Answer

With our last GC we paid 25% upfront then we did payments weekly on Thursday so he could pay his guys Friday. We were also responsible for paying the subs directly ( plumber and electrician). we retained the last payment until the punch list was complete.

Hope this helps,

Chance