Why Signing a Cost-Plus Contract With Your General Contractor Makes Sense

When I am contacted about an extensive remodeling job and/or repositioning of a commercial property, the potential client often wants to know if I should give them a ‘fixed-price’ proposal or do the work on a ‘cost-plus’ basis.

My answer is ‘it depends.’ If the job involves building out space in a historic or neglected building, it is likely that the general contractor will encounter surprises behind the walls, floors and ceilings. Each surprise requires more labor and materials. For instances like this, I recommend working on a cost-plus basis, where the general contractor executes the work then adds a fee to the cost of the project.

This approach requires trust and constant communication between the GC, the client and project manager. Each party needs to be on the same page so that all are involved in arriving at a decision when an issue arises. The GC should be accessible when the client asks why the costs are incurred and whether they are justified. The cost-plus basis works very well with customers who have done build-outs in the past or have experience in the construction industry and understand the complexities of building new within an existing structure.

Fixed-price proposals are more common for condo and homeowners seeking to build-out their property and budget appropriately. Custom-built homes and repositioned retail spaces in newer buildings are also conducive to fixed-price proposals. My simple rule: The more predictable the build-out work, the easier it is to write a proposal.

A fixed-price proposal may not be the right answer when working on a historic or long-neglected property. Most likely, the GC will need to amend the fixed price through ‘change orders.’ Each change order addresses whatever ‘unpredicted work’ is necessary to solve the problem. By the time the job is complete, the accumulation of change orders can make the job much costlier than the initial agreement. When this occurs, both the property owners and the GC may feel they have been taken advantage of.

At SPACiO, when the job is big and looks like surprises may be waiting, we recommend using the cost-plus approach. But the key ingredient for this strategy to succeed is trust. The GC must earn the trust of the client and the client should check the GC’s references to ensure that the partnership will be successful.

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