Things aren't always what they seem, and my recent experience booking airline tickets to San Diego reflected that sentiment all too well. After seeing low fares advertised online, I started exploring convenient dates and times for the trip. It wasn't until I spent hours coordinating the appropriate flights and then made the commitment to book the trip that the hidden costs began to surface — fees for checked bags, fees for choosing seats, fees for carry-on luggage, taxes, surcharges and more. The inexpensive flights that lured me in sure added up in no time and I felt like the victim of a scam!
In the remodeling industry, consumers are faced with a similar situation when it comes to bidding out home remodeling projects. Pricing isn’t always what it seems, so this month, we hope to enlighten you on why bids can be different and how contractors calculate price. Truth be told, all building contractors are not created equal and we’ll explain why.
Understanding contractors’ terms is helpful in realizing how it relates to your project. You may be familiar with a popular contract type called cost plus (or time and materials), which may initially sound like a win/win. In this scenario, the consumer consents to pay the complete cost for material and labor plus covering the contractor’s overhead and profit. The “plus” factor could be a fixed percentage or fixed fee and could possibly include a guaranteed maximum contract price. The advantage of this type of contract is that the homeowner can start quickly with minimal up-front coordination, but the major disadvantage is that costs can run high. The longer it takes to do the project, the more the contractor profits, so there is no sense of urgency or cap on time. Additionally, if the scope of work is vague, the builder can take the time to figure things out because his hours are being paid for. Lump sum pricing takes the risk off the homeowner and places it on the contractor; cost plus is just an open checkbook.
Lump sum or stipulated sum contracts are a different way of doing business. This type of contract requires the contractor to agree on specified services for a fixed price. Upfront, this contract price may appear higher than a cost plus contract; however, this builder must have all his ducks in a row to provide a price he can stand by. This must include materials, labor, overhead and profit. Unless changes are made, the customer pays the agreed upon price. There are no additional fees for work included in the scope; however, there will most likely be changes for owner-directed changes and/or unforeseen circumstances, which is fair to both parties.
The bottom line is, often times when construction drawings go out to bid there are still many unanswered questions for a contractor if he hasn't worked with the client from the design stage. In order to provide a firm price in the lump sum contract scenario, the contractor must pay attention to and price out all details, including spelling them out in the contract so there are no surprises along the way. This protects both the customer and contractor.
So, what happens when you bid out a project to two contractors who both use lump sum pricing and get a quote that fluctuates as much as 20% - 30%? You may be thinking: how can this be possible? You may also want to immediately go with the lower price. If your plans are not complete with selections or allowances spelled out, a contractor could be pricing your job with the least expensive options. The overall low project price may be appealing when you think you’re comparing apples to apples, but buyers beware. Remember the analogy of hidden airline fees. If your plans are not specific and a contractor initially prices your job on the low end, expect the price to go up as the details start to emerge. The increased price will be in the form of change orders that are additional to the quoted price. In this scenario, you may wind up paying what a reputable builder quoted in the first place.
At CB Construction, we believe lump sum contracts work best because they are created based on concrete job plans and specifications. During our design/build process, we discuss even the tiniest details so that we can accurately provide a price for our clients. Lump sum contracts are ideal when done conscientiously. If you’re looking for a fair price and expert contractor for your next remodel, call CB Construction today at 214.773.5566. Let us work on your before and after.
If you have any questions, please don't hesitate to call or email me.
5711 Mercedes Avenue
Dallas, Texas 75206