Cost-plus construction contracts are the most common type of agreement used in residential building projects. This type of contract involves the client paying the contractor for their expenses as well as a percentage for overheads and profits. However, clients may overlook certain aspects of this option which can result in misunderstandings, cost overruns, and finger-pointing. Who is to blame if proper due diligence is not performed? Here are a few factors to keep in mind:

The percentage for overheads and profit is irrelevant unless you know the cost

It is not enough to make the decision of which contractor to choose based on the markup alone. 10% of $100,000 is the same as 20% of $50,000.

Beware of a low markup percentage

Operating a construction company is expensive, and a good contractor should be looking to make a fair profit. A low markup percentage means there are hidden costs in the budget. That should worry you; if it seems too good to be true, it probably is.

Contractors factor a variety of different costs into the overhead markup

These are often termed ‘General Requirements’ and you should know what is included and what is not. Anything not included will be in the budget costs somewhere.

Every project needs to be managed

Therefore you should want to know how many hours of project management time are included and how they are accounted for. If you are told the project manager’s hours are included in the markup, you have no guarantee they are going to dedicate the right amount of time to your project. Be willing to pay for good project management – it is the key to a successful project.

A low markup on a low cost will only mean the contractor has to find profit during construction

This is accomplished by cutting corners, reducing time spent on the project, using cheaper sub-contractors, lower quality materials, or overcharging for change orders. There are always change orders.

Who are the subcontractors and suppliers?

Has the contractor shown you their quotes and even competitors’ quotes? You should want to vet those that are going to work on your project. They are vetting you.

Contractors have access to discounts that the general public does not

A contractor has better purchasing power, so if a supplier or subcontractor’s quote is the same as you can get at the store, question it. There may be a hidden markup, being marked up again in the overheads and profit.

Once you add up all the above, what markup are you truly paying, and how does it compare to the different contractors you’ve talked with? Think about it – why bid out the project, when you can ensure the best budget, with the best contractor, by getting all the necessary information beforehand? Paying attention to these details in cost-plus contracts can lead to better budgeting and ultimately, a successful project. Lastly, remember the old saying – “The devil is in the details.”

Provided by Simon Amesbury, Partner | Alair South Tampa