Custom Home Building Contracts: Understand This Before Signing a Cost-Plus Contract

Last year, we posted a blog about the differences between cost-plus and lump-sum contracts, along with the pros and cons of each. If you haven’t already, I would recommend reading it now! Quick recap: in a cost-plus contract, the client and the builder agree upon a locked-in, unwavering management fee that will be paid to the builder for the project. Any budget overages or remediation work will be at the client's expense; therefore, the risk lies with the client. As a result of decreased risk, the contractor typically reduces their profit which gives the appearance of a “better deal”. In a lump-sum contract, the client and the builder agree upon a locked-in, unwavering CONTRACT price for the whole project. Whatever profit the builder makes will not be revealed to the client. There is no risk for the client should any budget overages or remediation occur- the risk lies with the contractor. 

I have spent the last year and a half working on 4 different cost-plus contracts. I want to emphasize how thankful I am for every client and the opportunity to learn and grow. Starting any new venture involves trial and error and I am so grateful for the clients who have chosen to join in the adventure. We entered into these initial projects believing that a cost-plus contract was the best option for everyone involved. However, on each of these projects, unexpected costs came up. We have not been immune to soaring material prices (like concrete) after our budget was set and the contract signed. All of this resulted in the client having to cough up more money - and I’ll add - disappointedly. Because our contract was cost-plus, they had to experience firsthand the messiness of construction and shoulder much of the stress.

Is a cost-plus contract always a bad idea? No, there are certainly times when it is advantageous. But it is critically important that the client understand how much risk they bear in a cost-plus contract, AND how exposed they are to cost fluctuations. This can really steal from the joy and excitement of building your own custom home. As a builder who wants to glorify God and bless others, I have struggled with cost-plus contracts. Everything in me wants to swoop in and pay for budget overages and remediation work for my clients so they are spared the stress and strain. But when a cost-plus contract is signed and my profit is reduced, I’m stripped of the ability to intervene. 

We want to bless people. Period. If I could go back in time, I would have strongly advised most of my clients to sign a lump-sum contract with me. It may be more expensive (at least initially), but once that contract is signed, they can sit back and enjoy watching their home come together. When budget overages occur and mistakes are made, I can immediately cover them. Your peace of mind and pocketbook are spared the strain. 

This seems to be a theme with many of our blogs, but peace of mind is worth it every single time.