Construction Pricing:
Before entering into a contract with any contractor it’s important to understand a little bit about the basic contract types and the pros and cons of each.
Fixed Bid Contracts
With a fixed bid the contractor evaluates the entire project and presents the client with a single, fixed price to complete the project as designed. A fixed bid contract must include a schedule of payments connected to the completion of various elements of the actual project.
• The fixed bid has the advantage of being very clear: the project will be completed for a predetermined price.
• In order to prepare a bid the entire project must be pre-planned in considerable detail including cabinetry designs, plumbing fixtures, lighting fixtures, flooring types, etc. It is common for specific materials to be selected before the project begins or items can be assigned a “ cost allowance” before the project begins. During construction clients may then choose a specific item so long as the cost is within the allowance. Depending on the scale of the project this may be a simple matter or it may be hours and hours of shopping and communications and price changes.
• If a client chooses to make changes during the course of construction while working under a fixed bid the contractor will prepare a Change Order. A Change Order is a short document prepared by the contractor describing the changes to the plans and the changes in costs. Most contractors, including Equity Building, will charge the client for the time it takes to figure out and prepare a Change Order. One or two Change Orders during a project is very reasonable, but if a client will be involved in design changes and materials changes many times throughout a project this can be costly and time consuming.
• When a contractor is working under a fixed bid every hour on the job is costing money and reducing the possible profits. Although Equity Building strives to maintain good communications with our clients it should be understood that working under a fixed bid will absolutely minimize on-site conversations and meetings. The fixed bid works best for clients who are not interested in being part of the process and who don’t see themselves involved with ongoing design considerations.
• Working with a Fixed Bid Contract there is the expectation that repairs during a reasonable warranty period would be cost-free for the client. Presumably the contractor made a profit during the process and some of that profit would be used to cover potential repair costs during the warranty period.
Time and Materials Contracts
With time and materials contracts the contractor evaluates the project and prepares a detailed Cost Description document. The cost description should clearly describe all of the elements of the project and break each element down into a labor cost and a materials cost. With this document in hand the contractor and client have a pretty good idea about how much the entire project will cost, however, the actual costs of the project are determined by hourly labor costs and the cost of the materials.
• Before beginning work under a time and materials contract the hourly rates of the workers involved must be clearly established.
• Some Time and Materials Contracts include cost mark-ups for materials purchased and/or subcontractors hired. Understanding exactly what is being marked up is crucial for having a positive building experience.
• The total cost of the project will vary, either higher or lower, than the estimated cost and the client should be prepared for this flexibility.
• A time and materials project can be started without every detail of the design being established. This pricing style is flexible and allows for the client to easily make design decisions during the course of construction. This pricing system lends itself to more collaborative client involvement with the ongoing project.
• During a time and materials project the contractor and crew maintain time-cards detailing how many hours each day they spent working on the project and what was accomplished. With Equity Building these records are brought together, every two weeks, into a detailed invoice showing the labor costs, the tasks worked on, and the materials costs at each lumber yard. These invoices can be easily totaled at any time to clearly establish a total progress cost which can be compared to the Cost Description so that it is clear if the project is staying within its budget. This is helpful to clients who can make materials decisions based on whether or not the project costs are above or below the original goal.
• Working under a Time and Materials Contract the assumption is that any modest repairs during the warranty process would still be paid for by the client at the usual hourly rates. Under a Time and Materials Contract there are very limited opportunities for profit for the contractor. If a faucet starts dripping or a tile comes loose the contractor will expect to be compensated for his time to perform the repairs.
Hybrid Fixed Bid Contracts
• Depending on the project it is often possible to structure a contract such that the first part of the project is handled under a Fixed Bid and the finish phase of a project is handled on a Time and Materials Basis.
• In general the early, rougher stages of a project are simpler and easier to estimate for. Foundation, framing, roofing, etc. are often pretty straight forward. Interior custom details can be much harder to estimate.
• With the Hybrid style it is most common to prepare the Fixed Bid for all work up to “Finished Drywall”. It is important to be clear with a specific project but in general this means that site preparation, foundation work, framing, roofing, installation of exterior windows and doors, rough plumbing, rough electrical, HVAC, insulation, and finally the drywall is installed and finished. So the Fixed Bid contract is complete at that point. The home is weather proof, heatable, and will have some functioning electricity. Once the drywall crew leaves the project shifts to a Time and Materials contract for all the finish work.
• It is important to clarify exactly what is in the bid section and what is not; decks, siding, exterior trim, utility work, exterior paint, etc. can all be negotiated and clarity is important.
General Construction Pricing Notes
Equity Building is happy to take on most projects working under either pricing system. Most people will hire a general contractor just one time in their lives and the process and pricing isn’t necessarily obvious to people with no experience preparing for a major construction project. At the heart of these pricing systems is a different relationship to risk. No two projects are ever exactly the same. After 20 years in the trades we continue to be surprised by the findings inside the walls of old homes and we continue to evolve as new products and materials become available to our clients. The truth is it is impossible to know the actual costs of a project before it is done. We prepare and estimate as carefully as possible before every job and yet there is always a risk that some part of the process will take longer than anticipated or require more costly materials than we had thought. This is a fact for all contractors at all levels. The different ways that this inherent risk is managed is at the heart of the pricing systems. Under a fixed bid contract the contractor assumes all of the risk for unforeseen difficulties and all contractors address this risk in the same way: we add a financial buffer into our bids. Depending on the complexity of the project and the savvy of the contractor this buffer may be small or large, but it is always there. If the project goes smoothly and the surprises and miscalculations are minimal than the contractor does well and holds onto that buffer as a larger profit as a reward for assuming the risk. With a Time and Materials contract the client agrees to pay all of the actual labor and material costs of the project. If the project is well planned and the estimate is thorough then the project wraps up on budget and the client has held onto the money that would have been spent on the contractor’s profits and buffer as a financial reward for taking on the risk.
Having a clear understanding of these pricing systems and having a clear communication with your contractor is ESSENTIAL to having a positive experience with your construction project.