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'Cost-plus' contract has drawbacks for SL homeowner

By Bill Gephardt | Posted - Nov. 27, 2013 at 11:34 a.m.


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SALT LAKE CITY — If you are considering having some construction done on your home, your contractor might offer you what is known as a cost-plus contract.

Salt Lake homeowner Janelle Williamson said her cost-plus contract became loaded with surprise extra expenses.

"We love the neighborhood, but our family is growing. We either had to choose to move or build up," Williamson explained.

So, she decided to add a second story to her Salt Lake area home. Her husband created the designs, an engineer drafted the plans and they hired a contractor.

"They explained to us that they do cost-plus contracts. Many of the contractors we talked to seem to prefer that method, or that was the only method they would use," she said.

So what exactly is a cost-plus contract? The contractor buys the materials. The homeowner reimburses the contractor for those materials and labor, and then the homeowner pays a fee on top of that for the contractor mark-up. The homeowner also pays if there are unforeseen expenses.

Many contractors love cost-plus because there's no set price. If they come across an unforeseen problem they can fix it and bill the homeowner. Under a fixed-price contract, where the price is set, a contractor can't pass that expense on to their client.

Gephardt on contracts
For me, if it's a cost-plus contract, it's not a contract at all.

I would prefer to find a contractor who claims to have the experience to properly estimate what the project will cost. That's why we hire them.

With experience, a contractor ought to be able to anticipate unforeseen problems and build in a dollar amount based on experience. If changes are needed in the course of construction, we can re-negotiate that so we have another firm contract.

So under cost-plus, as Williamson learned, a contractor doesn't have to be as accurate in their initial bid.

"Six weeks in, we started seeing the actual bills coming through, what the costs were. We realized, wait a second, these are a lot higher than the estimate," she said.

Williamson said the cost of the framing of the second story alone was double the estimate. She said the project on the whole is 40 percent over the estimate and there's still plenty left to do.

"There's no incentive for contractors to keep costs down to what they estimate. As far as I can see, there is no incentive for contractors to stay away from low-balling when they do it," she said.

Michael Stone, co-founder of Construction Programs and Results Inc. has taught estimating to thousands of contractors.

"Cost-plus is the worst possible contracting method that home or building owners or contractors can use to get work done on a home or building," he said.

He said nine out of 10 arbitrations between project owners and contractors that he's called into involve cost-plus. Stone said in many cases, contractors don't take the time and energy to learn how to do a good job of estimating.

"These guys get busy working on jobs and other things, they don't believe they have time to read and study on how to do estimating. So they revert to the cost-plus method because they think they're going to get paid no matter what. No liability, let's go for it," he said.

More on cost-plus contracts
According to About.com, proponents say cost-plus contracts allow the contractor to focus on quality instead of cost, and the contractor will not be able to reduce workmanship. It says cost-plus can be used when there is a high probability that actual cost might be reduced, when there is not enough data to perform a detailed estimate of the work, or when the design is not completed.

Many homeowners opt for cost-plus over a fixed-price contract because they believe it's a cheaper way to get the job built. Stone said that's almost never the case.

"I've not seen one single cost plus job in 15 years of arbitration whose final total price for the job would have been less than a properly prepared estimate for a fixed figure," he said.

Williamson said she'll be happy with her remodeled home once it's complete, but she'll stick with fixed-price contracts from now on.

"If you have a set budget that you want to work in, stay away from cost-plus contracts," she advised.

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Bill Gephardt

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