There are many misconceptions and potential legal issues/dangers with Cost-Plus contracts in construction. This type of agreement is not simple and has more difficult legal guidelines to document and manage. There is an embedded trust in a Cost-Plus contract (sometimes called Time and Material contract or T&M) that puts contractors at a higher level of ‘reasonable care’ (the legal definition).
That said, some homeowners and contractors prefer Cost-Plus contracts.
Reasons to use a Cost-Plus contract
Owners
Homeowners and building owners often request a Cost-Plus contract because they believe it will save them money. They don’t trust their contractor to provide a fair price, and cost-plus allows them to see invoices and approve all of the project cost.
If the owner thinks there are likely to be several changes in design and material selections during the project, they may opt for a Cost-Plus contract to enable periodic monitoring and adjustments to the agreement during the project. They believe this will avoid the confusion of constantly amending and re-wording the original contract by way of change work orders.
Contractors
Contractors often prefer a Cost-Plus contract for two major reasons:
- They don’t know or understand how to estimate a project, or they don’t have an estimating system in place that allows them to accurately estimate a construction project. They default to Cost-Plus because they believe these contracts will allow them to bill for all their job costs, all their overhead and make a profit. Unfortunately, this seldom happens. (For more on how to estimate a construction job, review our Profitable Estimating Training Class.)
- They don’t know how to establish a sales price. The book, Markup & Profit, A Contractor’s Guide was written to help contractors know how to price their jobs to cover their overhead expenses and make a reasonable profit.
Reasons not to use a Cost-Plus Contract
Owners
- Because detailed project study and estimating isn’t necessary with a Cost-Plus contract, there is an increased chance that the original estimate will be low, sometimes very low. When the real costs of the project start coming in, you will be requested to pay more for the job than originally expected.
- Cost-Plus contracts give the contractor little incentive to get in and get the job done. Instead, the contractor’s incentive is to keep the clock running, especially if they don’t have the next job lined up. Cost-Plus jobs often run far longer than would be considered normal with a fixed fee contract, and that means more expensive.
- Since these contracts are often structured such that, the higher the cost of the project, the more money the contractor can make, in effect, the contractor has less incentive to save the owner money. One of the ways around this scenario is for the owner to offer a bonus if the contractor can complete the project under a target dollar amount. However, a target can be difficult to meet if changes are made to the project.
Contractors
The following items are some of the major reasons that a contractor shouldn’t use a Cost-Plus contract or Time and Material contract. This list applies to all general contractors and most specialty contractors in the construction industry. An exception would be using Time and Material billing for service work such as electrical, plumbing or HVAC service calls. Those agreements should be kept to a maximum of $2,500 – $3,000.
LEGAL ISSUES
- There is no universal definition of Cost-Plus Contracts or billing, thus creating confusion and misunderstandings almost immediately in any contract. Attorneys practicing construction law in the same city or town will often have different definitions of what is a Cost-Plus contract.
- Lenders often will not lend on Cost-Plus jobs unless there is a not to exceed clause. When the job goes beyond the not to exceed clause, you must have written authorization to do that work (signed, dated and completely priced out change work order) or your customer is not obligated to pay you for the work.
- “Not to exceed” doesn’t allow room for unexpected problems or unknown conditions. Even in a fixed price contract, you provide conditions and notes to protect yourself from unknowns. If you are accurately providing a not to exceed price that the client expects or accepts, you are basically just providing a fixed cost bid that can be reduced by cost savings along the way with all benefits going to the client, but all risk of cost increases is on you.
- Some states now have laws that specifically prohibit the use of Cost-Plus contracts.
- Based on discussions with attorneys and our work in arbitration, Cost-Plus jobs generate lawsuits at a rate of 2 or 3 to 1 and arbitrations at 9 to 1 over fixed figure contracts.
- Because detailed project study and estimating isn’t necessary, there is an increased chance that the original estimate will be low, sometimes very low. That increases the risk of being accused of violating the Law of Good Faith and Fair Dealing by low balling estimates, even if it wasn’t intentional. It can also lead to a fight over money when the actual costs start coming in.
- Because of the perception that the Owner is required to pay for absolutely everything, many contractors do not get written and signed Change Work Orders or Additional Work Orders before making a change. They operate under the belief that they’ll be paid for all the work that they may do on that job. This can also lead to a fight over money when the owner realizes how much they owe on the project.
These changes to the original scope of work are ones where the clients rarely want to pay a fair price. This is particularly true when part of the original work has been completed. If the extra costs aren’t documented at that time (in a fixed cost agreement the funds would be collected at the time of the change), the chances of the client protesting later are much greater. If all else fails, the client will later come back with, “we had a verbal agreement you were going to furnish that at no additional charge.” - Changes can also increase the timeline on the project, an issue that isn’t always documented. All changes to the cost and timeline of a project must be in writing and should be sent to the client the day the change was discussed. These issues can and should be addressed and clarified in the original contract documents.
- Owners often go into a Cost-Plus contract thinking they have ample money to cover the job. When the job reaches the 60% to 80% completion point, and the owners have made multiple changes to the job increasing the cost, often substantially, they run out of money. Their claim will be that the contractor overcharged from the start of the job, and the contractor will be expected to finish the job for the money that’s already been paid.
DOCUMENTATION REQUIREMENTS
- For your own protection, you must keep an accurate day to day log of all labor, materials, subcontract and other fees or costs on the job to be able to verify your actual expenses to date. The contractor should also keep a good set of before, during and after pictures to verify all work in progress or completed and all related expenses. If you do not, depending on your contract, you may not be able to collect for undocumented expenses, regardless of what kind of or how much work has been done. This exercise will increase the contractor’s expenses on the job in several different areas above what would be considered normal on a fixed price contract.
- In addition, you must have in your possession every document from the job that has incurred a cost. This includes all time cards, invoices, receipts, or any other papers related to the project. If you lose any item, you may not be paid for it.
- The client often will want a budget spreadsheet to manage the project by and a ‘not to exceed’ amount in the agreement, as well. They want the best of all worlds with no risk to them.
- Plan to be on email each evening to each of your clients regarding their Cost-Plus project. These communiqués document the contractor’s process, what has been done, by whom, when and with pictures to later prove what happened if challenged in court. Again, Cost-Plus agreements equate to voluminous documentation. That documentation is extra time and in actuality increases the contractor’s cost of doing business, particularly if the work is being done by a specialty contractor(s).
- Of further concern, they will generally want to control all construction funds and pay the invoices themselves. This assures the client of a tight hold on the costs but at the contractor’s risk.
- With the need to keep very careful records on the jobs, you substantially increase the amount of meeting and preparatory time necessary for the job. Often this time will be 3 to 4 times the amount of time necessary to complete a fixed figure contract. Cost-Plus jobs require at least two and often three times as many meetings with the customer to review job progress, billings, invoices, labor, etc. Who pays for the meeting time and the extra administration time to prep all documents for labor and invoices from subs and suppliers?
WHAT HAPPENS IF?
- Who draws the plans and gets the permits on a Cost-Plus job? If a mistake is made on the plans, who pays for the time it takes to redraw the plans, and who pays to tear out the mistake and rebuild it? Who pays for the time the contractor must spend to go to the building department and get a new or revised building permit that includes the revision? Who pays for the revised permit?
- Who pays for the Engineering if the Owner forgets to include it on the plans that they provide, and who pays for your down time while you wait for these revisions?
- Suppose Engineering on a portion of the job gets by the plans examiner, the inspector catches the problem, and the job has to shut down until the engineering is complete and new plans drawn and ready to use. Who pays for the new plans & delays? Who pays for tearing out the wrong structural work completed and the materials that are ruined due to tear out? Who pays for the additional labor needed to correct the problem? Who pays for the down time for you and your crew, driving time, re-start up time?
- Will the Owner be willing to pay for your travel time and mileage to and from your office for meetings or discussions on problems that might arise on the job, or from the job site to your suppliers and back to the job site for material pickup that either they or you forgot?
- If you make a mistake on a Cost-Plus job, who pays for it? Do you donate your time or is the customer willing to pay for it? Who pays for ruined materials? Who pays to go get the new materials and the cost of the vehicle expense to do the pickup?
Unless you have specific language, which precludes you paying for errors/mistakes, an owner can legally come at the contractor on this point. Leaving out the language about mistakes does not protect the contractor. In actuality, a court of law will likely make that decision for you. There is a legal concept called “reasonable care”. Contractors are held to a reasonable care mandate. Therefore, expect the Owner to be on-site more and be more scrutinous of the contractor’s process when using a Cost-Plus agreement. - Who makes up the material lists for jobs with Cost-Plus contracts that are needed before the job starts? If you do, will you be paid for that time?
MATERIALS
- Owners are far more prone to want to furnish some or all of the materials for their jobs when using a Cost-Plus contract. The Contractor is expected to guarantee those materials when installed, not to mention losing the markup on those materials. Who pays for the time to replace defective materials supplied by the owner?
- If the materials for the project are ordered through the contractor, they will actually be responsible for the financial payment to these suppliers as the contractor was the point of contact. If the owner does not pay in a timely manner or chooses to pay a reduced amount, the contractor is responsible for that payment. Specialty contracts should spell out who the parties are involved in the Cost-Plus agreement.
- What happens when the Owner is to supply some of the materials and they forget to buy a certain item or don’t know what materials to bring to the job site? Who pays to get the forgotten items? What happens if it takes the owner two or three days (or longer) to get the needed materials to the job site? What do you and your crews do in the meantime and who pays for that down time?
- Owner goes to your supplier (with your permission) charges materials for the job to your account. What happens if you send the owner to a certain supplier you normally use for materials, they purchase the materials, and then later claim that they could have purchased the same materials at another location at a better price? You gave them the higher priced supplier to go to, so you are responsible for the difference in cost.
- Cost-Plus reviews show the Owner what you are paying for materials. This will increase the probability of complaints from the customer that they could have bought the same item elsewhere for less money. It also leads to customer believing they only have to pay the amount that they could have bought the materials for.
Further, an owner can file a civil claim against the contractor alleging fraud by means of collusion with suppliers. Sadly, this actually does happen and all too often.
PRODUCTION ISSUES
- Owner expects you to be fully productive on their jobs for 8 hours a day. They will be looking over your shoulder constantly. You will seldom if ever get the job done as quickly as they are expecting you to do it. Will they be willing to pay for your State’s mandated morning and afternoon breaks for your employees? Will they be willing to pay for smoke breaks, coffee breaks, mobile phone time, bathroom breaks? Will they pay for the time for you or one of your employees to escort an inspector through the job and answer questions? Who pays for the labor and materials to do required changes?
- Contractor must be far more diligent in policing employees so that they are productive on the job at all times, with no miscellaneous discussions or activities on or about anything other than the job they are working on. Again, this pertains to starting and quitting times, smoke breaks, coffee breaks, mobile phone time, gaming or texting.
PRICING ISSUES
- It is very difficult to “compete” on Cost-Plus commercial jobs because larger construction companies will take these jobs at cost, to build presence with corporations that allocate the multi-million dollar projects on assignment basis because of favorable past performance.
- Owners believe that Cost-Plus jobs will cost them less money to build their job. Therefore they expect you to charge them less money for the work that you do. ( i.e., less than your normal overhead and profit). In most cases, Owners believe that you should only make:
- Remodeling = 10% Overhead and 5% to 10% Profit
- New Home Construction = 10% Overhead and Profit
- Specialty Construction = 6% to 10% Overhead and 5% to 10% Profit
This makes it extremely difficult for you to use your established markup on that job, especially when you have to show them your invoices at the normally required meetings to review the job progress and expenses to that date.
- Owners do their homework, put their job out for “Bids” @ cost-plus a 6%, 7% or 10% markup. They tell you if you don’t want to bid that way, don’t enter a bid. They also tell you that “You’re not going to make your normal markup on my job!”, i.e. take it or leave it.
The client will almost never agree to the contractor getting a reasonable margin on a Cost-Plus agreement because most if not all of these clients believe that Cost-Plus is a cheaper way to get a job done. If the remodeling contractor attempts to negotiate at least a 33% gross margin or the new home builder attempts a 21% gross margin, which is the minimum either should charge, the client will likely think the contractor is trying to rob them. There are many companies who are desperate and quoting such low numbers to the client that they will drive themselves and others out of business if you try to compete with those lower margins. - One way many contractors handle Cost-Plus contracts is to take items that are considered overhead and stuff those costs into the job cost section. In court, a sharp expert witness will find the overhead items listed under job costs and accuse the contractor of “double dipping” on the job. This immediately paints the contractor as dishonest, making a win in court even more difficult if not impossible.
SUBCONTRACTOR ISSUES
- Most Cost-Plus contracts give the Owner the right to either select the subs for their job from a list supplied by the General Contractor, or the Owner can hire their own subcontractors that the Owner will supervise during the job. What happens if subs hired by the Owner don’t adhere to the General Contractor’s time schedule? Who is responsible for delays and downtime caused by their lack of cooperation? What prevents the Owner from suing the contractor for lack of supervision and other damages caused because the job did not get done on time?
- When you have subs working on the same project, some hired and supervised by the General Contractor and some hired and supervised by the owner, what do you do if there is a scheduling or other conflict on the project? Who resolves it, how long will it take to resolve? If the General Contractor is responsible for supervising subs hired and paid by the owner, will the General Contractor be reimbursed for that responsibility (and liability)?
- What does the contractor do when the subcontractors hired by the owner will not do as instructed by the contractor or adhere to the contractor’s time schedule? What does the contractor do when the sub wants to raise their price(s) during the job because their original estimate for the job was too low?
- If (for example) a drywall contractor hired by the owner runs a screw into copper pipe installed by the plumber, who takes responsibility? If it isn’t discovered until water damage appears when the project is complete, who gets called for the warranty?
- On Cost-Plus agreements, the contractor is required to solicit multiple bids on each trade to document that he is getting the lowest price on every category. These bids are then provided to the client as documentation and the client awards the project to the lowest bidder. There is much time required in this process. This is not optional. Using massaged numbers is a quick way to a legal action by the owner against the contractor and the contractor being branded as deceptive.
This may also result in the contractor having to try and manage small companies or “hobbyists” that do not know how to estimate or in fact, build the job they are bidding, or how to manage their own company. Additionally, they often don’t show up on time or at all and do substandard or just plain unacceptable work which the contractor then gets blamed for.
There are no hidden profits to be realized in this form of agreement. You do not even know what company will be providing the services and they will have their number driven to their lowest margin. To further complicate the issue, these low subcontract bidders will be trying to get more money along the way to make their part more profitable for themselves (yet another time consuming problem to manage). - Do you write a subcontract agreement for each contractor? How can you protect yourself if you do not? This is a good practice in all types of construction agreements but especially important in Cost-Plus.
- There should never be any later discounts or refunds from a subcontractor or supplier directly to the contractor. If that should occur, the contractor is legally obliged to pay those to the Owner. Also, if one of those were to occur, the owner will then question how many more of those are out there leading to possible legal action against both the contractor and their firm?
Again, is that aspect a component of the contract documents? Many contractors try to skirt that issue and attempt to get kickbacks after the job has been closed out. These are ethics issues as well. It is a form of stealing client funds. Just because one gets away with it does not change that it is a form of theft. Where does the contractor draw the line?
It should be clearly stated that all quotations are at their net and noted as such to preclude the later discount problem, which again, would be a fast track to a legal problem. The contractor, via your contract, must assure the Owner there will be no additional monies exchanged.
An important question to ask contractors is why would you choose or accept a Cost-Plus agreement over a fixed cost/fixed scope of work contract? After all, you must know your overhead costs and material/labor costs no matter what type of agreement you use. In a Cost-Plus agreement you are held to higher level of accountability than on a fixed price agreement. There is huge case law that determines what levels a contractor is held to for a Cost-Plus agreement.
Previous legal advice suggests that an owner wanting a Cost-Plus agreement will be the most likely to take legal actions against a contractor either for real problems or a perceived bargaining wedge to get the contractor to lower his fee. They are more interested in a lower price rather than a fair price.
A proper construction agreement is always essential in our business. In theory, this legal instrument should fairly represent both the owner and the contractor/construction entity. This agreement should always follow the unwritten rule that almost all judges and arbitrators look for and that is the law of “Good Faith and Fair Dealing.” This definitive legal instrument describes the scope of work, the value of that work and the points at which the owner pays for work completed/product ordered, etc. The contractor’s business consultant/attorney is a must to assist with a well thought out, fair to both parties and yet protective (if all the rules are followed) agreement. The threat of legal action is very real and all projects should be managed to protect the company and individuals in the firm. In addition to legal actions, the contractor’s reputation is at least equally important.
What’s the alternative to a Cost-Plus contract?
The best alternative to Cost-Plus contracts are fixed figure or lump sum contracts. In that type of contract, the contractor clearly defines the work to be done, and quotes a firm, fixed price to do that work. The only thing that will change that price are changes to the work, and those changes are only made after the owner knows what the change will cost them, how it will increase or decrease the fixed price, and has signed their agreement to the change.
The advantage to home or building owners is the certainty of knowing what the job will cost once it’s completed.
Often material or installed allowances are required to handle selections, and if the actual selections differ from the allowance, a change work order is written for that change.
Properly written, a fixed price contract will greatly reduce the potential problems that are inherent in Cost-Plus contracts and get the job built at a fair price.
Thank you to Michael Beck, senior partner at Beck Design Group, Inc., Atlanta, Georgia, for your assistance in expanding this document. (updated June, 2020)
Related Articles:
A Homeowner’s View of Cost-Plus
Clients Wanting Cost-Plus
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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After reviewing all the comments… I have some comments on… the comments.
Safety equipment. Personal Protective Equipment (PPE) as required, not billable. This would be hard hat, work gloves, vis vest, boots. Specialized safety equipment, ear plugs, safety glasses, goggles, respirators, dust busters, etc. for the whole job are billable. Really, these things are minor. Compared to your tub backsplash, it’s a drop in the bucket.
Expendables. Screws, nails, tape, floor protection covering, spacers, etc. etc. etc. are all billable. Usually they can’t be reused. There may be some left over hardware, you can ask to have them leave it there if they billed you for it, regardless of the type of contract.
Hours billed. This is one that a LOT of people, even contractors screw up. Time is billable from the moment they start work. If for brevity’s sake this is a trip to the hardware store to buy some equipment needed for the job, yes, it’s billable. If they want to go for a McDs breakfast before work, it’s not. Commute times are not billable. Reasonable wait times are billable. If they need to wait for putty or mud to set in the drywall and it is only 30-90 minutes, it’s billable provided they resume work. If they lay concrete or paint a wall that’s going to take a few days to cure before they can proceed, it’s not reasonable for them to bill you to stand around or go shopping while you wait. Work just gets halted if nothing else can be done.
Rates. Different trades bill out at different rates, even if it’s a one man operation doing it. General labor and site cleanup would be the cheapest, skilled trades would be the most expensive. Just because they do some general labor doesn’t mean you are paying a flooring or tiling guy bottom of the barrel rates. And General labor goes up the more weight you have to carry. If you’re picking up plastic bags and small scraps it’s cheaper. It’s not by the second though, if the guy is cleaning up as he goes along while he is doing skilled trades work, hes saving you money.
I ONLY bid time + materials. Making the entire bid, and being forced to buy all their materials on my dime (to save on delivery costs or runs to the supplier) then doing the work, either by milestone payments or another arrangement, is a recipie for disaster. The owner has you by the balls and they have your money. Even worse, all these materials you bought are already installed, and save for blowing almost as much time demoing the job (and potentially dealing with police and a god awful mess) the owner has all the power. “Accept my price, because I won’t pay a penny more”. And that’s if they even don’t stop returning your calls… then you are scrambling to get a lein against their property and you wont see a dime until they sell it, even if you are successful in getting the lein. Talk about a pain in the neck!
I walk through with them what they want to do. What kind of flooring, do you want repainting, what color cabinets. I work with them to keep the materials costs down (do you really want a marble countertop or a much cheaper veneer on MDF or plywood?, do you really want those stainless steel appliances, they will really eat into your budget? Are you sure you want to move a basement toilet? We could move a wall around and reframe it, but that will mean jackhammers, plumbers, permits?)
Then I use my pro account to build them a shopping list. I usually use Home Depot. If the customer tries to balk that you ordered it from Home Depot and they can get it cheaper somewhere else, then you can take the quote to Home Depot and they will match the price or explain why it is an inferior product. Hard to go wrong with Home Depot, I can’t imagine a civil judge accusing you of trying to rip them off when you provided a parts and materials list from Home Depot and you made no markup. You’ll get in trouble by blind quoting them materials and marking it up. Plus home depot delivers. And it’s on their own credit card, not mine.
I make estimates on the amount and types of labor and at which rates, but am clear that there is always a surprise on site. If there is a surprise I will show them the surprise, why it is going to take longer than anticipated, but I usually build in a bit of extra time on my estimate.
This protects
(a) Me. I’m not out thousands in materials crying because my customer is a douche bag who wants to dispute every line item once the job is done. I’m also not waiting around for them to pay an invoice forever. They buy the materials up front, and I bill them daily or weekly depending on the size of the job. No money = work stops.
(b) Them. If they think we’re dragging our feet milking the job, they can always fire us and hire another contractor to do the job. Chances are they will come back because a low ball contractor will either do a crappy job, or take twice as long, or have to make constant variances for additional costs.
I refuse all hard quotes on a sticker price for the job. I know customers like it because it helps them with their budgeting, but they usually negotiate way too hard because your talking big numbers. When they get their material delivered, they can see it all right there. As the job gets done, and they are paying for labor costs, they can see the progress and ask questions. If they make multiple change requests, they can just be warned that this will take additional time, which will increase their costs, and let them make up their own mind. Document them.
I always make the customer pay for specialized tools or tool rentals, and any disposeable items required for the job, but I put those in the materials and parts list.
I would love to do all my contracts fixed price; with fat, hidden profit margins.
All you, as a homeowner has to do, is make every single decision before you ask me for my price.
Hi there! I got the Materials bill from the contractor – backed up by receipts – but I’m rather shocked at what’s included as “Materials” – things like coveralls, plastic sheeting to cover the carpets (especially when carpet protection is billed at $250 as a separate line item), trash bags, drill bits and many other things I’d consider Consumables or Overhead costs as opposed to Material costs. Can someone please help me understand a little better the difference between Materials (which I’d consider the products that are actually used in the final product and become a part of it like drywall and nails) and the more intangible, disposable items and those which the contractor could potentially use the excess (bulk nail purchases and rags) or item on another job (tools, drill bits and clothing items)? This is a high-end contractor, and I feel he’s being very cheap. Am I wrong? What would be fair material costs to pay for?
Remember, you asked for our opinion. Your note is another example of why I advise against Cost Plus contracts, or Time and Material contracts that run over $2,500. Home and building owners often think they know enough about construction that they can keep their contractor “in line” and not get ripped off. They want to control the process and this seldom works.
Contractors shouldn’t do cost plus contracts because it requires itemization and leads to questions like this. The issue shouldn’t be little details like tools and trash bags, the issue should be did he do the job you wanted, in the time frame you wanted, at a fair price? If you’d had a fixed price agreement, that’s what you’d be looking at.
Instead you chose a contractor who works on Cost Plus, and now you see the results. I think you have a reasonable argument on the plastic sheeting/carpet protection. Paper coveralls could be open to discussion; I’d normally call them an overhead expense, but your post is a perfect example of the first sentence in Item #1 above – you have confusion and misunderstanding about what is and isn’t included in “cost”. And to directly answer your question, as it says in Item #1, there is no universal definition.
All that said, the best approach here is to sit down with your contractor, tell him your concerns and listen to his answers. If the answers make sense then you should be able to resolve the issues. If his answers are not to your liking, then call your local Better Business Bureau and ask them for arbitration on your case. Be sure to insist on an arbitrator who knows construction and you will probably get a fair hearing.
If you don’t like that approach, you always have the right to get an attorney and pursue this through the courts. Next time I suggest you do your homework and find a contractor to do your work who works on a fixed price quotation.
Michael, thank you so much for your response. I truly appreciate your initial post, and all the discussion and comment thereafter. It’s been very informative and helpful – I just wish I’d found it sooner.
You mention judging the project on the bigger picture of time frame and fair pricing – and you are right of course. Unfortunately we have major issues there too, which we’ve been trying to resolved, but suspect that we may have to resort to mediation.
Lesson’s learned and ‘school fee’s’ paid. I will go into my next project with a much better understanding of the potential pitfalls, and definitely avoid Cost Plus contracts. Thank you for your post.
Unfortunately you are right and most people demand T&M when they don’t agree with the fixed cost quote. Well complications almost always arise or changes are made which puts it far beyond the fix cost quote. Then the payee claims fraud when you were just being honest.
**”Home and building owners often think they know enough about construction that they can keep their contractor “in line” and not get ripped off. They want to control the process and this seldom works.”**
I find a project almost always runs off the rails when the owner gets directly involved. It may work for moving someone’s furniture (although laughably, I’ve seen that run off the rails too when she snapped her own table legs and tried to blame us for it).
This is because (a) they seldom have no idea what they are doing, or decide to go with a cheaper product to save money, and (b) as the contractor, you lose control of the job – they screw it up and try to blame it on you.
I did work for a brewery building a concrete pad for an additional beer vat. The structural requirements were pretty big, at over 5,000 lbs for a 10×14 pad on top of warehouse concrete. I was very careful, was probably the best rebar and forming work I’d ever done. When I showed up the next day for the pour, not only was there no pump truck as promised (we had to barrow it all in) but he ordered concrete with the biggest aggregate I’ve ever seen, I haven’t seen a parking lot even with that kind of aggregate. Maybe a country road, but not for a warehouse smooth finish in a million years. He figured a power trowel would smooth it all out, but it kept grabbing the rock aggregate and kicking like one of those bull rides in a bar. Blamed us because it wasn’t nicely finished, even though we troweled it all exactly to a 5% grade (so the beer wouldn’t pool at the bottom of the vat) as per the drawing. They mucked up my rebar, and my forms, putting the nut size in on bolts on the concrete side (good luck getting those forms out cleanly). He kicked us off the job. He could have just used a thin layer of self-leveling compound or a couple bags of site mixed concrete without aggregate and trowels to fix his mess. Least we got paid.
Too bad it’s so difficult to tell them, once we start work, let us work, and we will meet regularly with progress reports, let you know about surprises and ask you how you want to proceed, but in the meantime just stay out of our way and let us do our jobs. I understand it’s their house, but micromanaging a crew on a project you know nothing about is only going to cost you more in the end anyway.
Ur apsalutly right fire him materials r only the things that really actually being installed in ur home and will stay in ur home after contractor leaves, drill bits paper to cover floors etc is our responsibility
I want to hire you! Thank you for your response!
Nails (or any other expendables) are part of time and materials, generally.
Tools are not.
Doesn’t seem he should be able to double bill you for carpet protection and materials for carpet protection.
But remember, if this was a bid, he might have added 20% of pure profit to the cost, and would not be required to show you any documentation of how the money was spent.
Floor protection, either the cardboard rolls, or plastic polyurethane sheet, and duct tape are definitely consumables. A contractor would have to be pretty cheap to include poly or paint and mud splattered cardboard floor protection. I’m not sure how he is itemizing his estimate, but he could be billing out $250 for the labor to install the floor protection plus the disposeables.
Hello, I just started reading your blog and wish I had found it sooner. I could use some general advice and thoughts on my issue. I made the mistake of signing this type of contract. The bid was $18K to remodel a small bathroom. Down to the studs, leaving the toilet and bathtub in the same location and moving the sink. We had not yet picked out the type of sink, faucet, tub, shower kit, toilet, tiling, flooring and agreed to add those costs on to the final bill. We chose about $5K worth of those items (including the 18%) Well, once the job was done the contractor showed us a bill for $40K! with all kinds of extra charges that we never approved. We never changed the plan or made any work order changes. He now says that all materials, including everything you could possibly imagine were not included in the contract. This was certainly not what we agreed to (or at least not what we thought we were agreeing to!). We paid $26K after adding up the costs that were approved, and are disputing the rest with the contractor, who just keeps insisting. I fear that I’ll have to pay a lawyer. We paid the contractor what is a fair value that includes his 18% markup, taxes and all the materials we ordered and approved. Demanding $40K on an $18K bid seems like it violates the law of fair dealing and good faith. We are angry and sad all at once and could definitely use some perspective.
We can’t offer legal advice, but my best guess is you will need a good construction law attorney to help you resolve this dispute. When I say construction law I mean just that. Don’t try to find and use a general practitioner to help you resolve this issue.
Future advice: don’t do cost plus. Don’t sign an agreement without having all (or most of) your selections made upfront, that’s a lot of unresolved issues that can have a major impact on the final cost of a project (not just material cost, also labor and subs).
As far as what you owe this contractor compared to what you have been billed, I can’t offer a guess on that either as I haven’t read your signed agreement. I know from long experience as both an expert witness (35 years) and as an arbitrator (17 years) that there are always two or more sides to any story or dispute. So that precludes me from making any judgments or perspectives here. I will say that something doesn’t sound right with this whole scenario and the sooner that you get this resolved; the better and cheaper it will be for you.
Greedy contractor I can Reno a washroom normal size for 10 000 plus materials in luxury
Ha Ha Kohler Veil toilet alone is 4400 retail. 10 k might cover the fixtures alone in a 10×12 Master bath.
I doubt you were getting ripped off much, but maybe you were. What you got was the quality of estimate you will get when you don’t have the entire scope of work on one peice (or a few peices) of paper. It’s possible he didn’t include expendables, but that doesn’t clock in at 15 thousand unless your project was colossal.
Chances are the original bid was way too low. You’re talking about plumbing, flooring, tiling, cabinets, all the materials. $40K for a bathroom reno is pretty rich, but once you start talking flooring and tiling and plumbing costs will soar. You definitely weren’t settling for gettinig the job done on the cheap.
Comes down to the old adage:
Good
Fast
Cheap
You can only get two of the three.
“absent changes to the work or other unforeseen circumstances, courts have consistently held that a contractor must complete the work within a reasonable variance from its cost estimate. What is “reasonable” depends on the circumstances. This author has reviewed cases in which the contractor was held to its cost estimate, plus an increase of 5 to 20 per cent” https://www.on-sitemag.com/…
Sandy, great info but I want to clarify the article was written by a Canadian lawyer – it might not be applicable in the U.S.
I think I made a big mistake, on a recommendation, I hired a contractor to replace a deck with a paved patio, two cement walkways and a driveway with pavers also. This, to be done in two phases: Phase 1 : the paved patio and a walkway, Phase 2 : a driveway and a walkway to the front door. We agreed on a cost plus and he gave me an estimate, that was at the beginning of November, the 2 workers were good and worked hard. The contractor gave me an invoice at the beginning of each month, not very detailed, but I paid them. Then phase 2 started , I received the first invoice for phase 2 , it was almost as much as Phase 1 complete! that is when I asked for details of all the invoices . The contractor gave me copies of all the detailed expenses and hours worked. What really upset me is that all the hours for one of the worker showed consistently 8 hrs or 7 hrs, a couple of 2 hrs almost everyday. Since I am home all the time , I am aware of the arrival and departure of the workers and I have kept track of the time they were spending here. I knew that,that
worker’s hours could not be right so I questioned the contractor , he told me that the working time started at 8 am, that he was shopping for material needed on the job before coming to the job and after leaving the job. He said that every expenses were mine to pay, gloves, eye goggles , port a potty, gas, etc.etc. I am an old woman , 88 years old, and I feel I am being cheated.
Not so sure why this is so hard to figure out. No gloves, eye goggles , port a potty, gas, etc would be needed if you didn’t have this job done. A contractor is entitled to be paid for every second they put into a job, the same as a lawyer, account, or doctor is. Furthermore being a 88 year old woman doesn’t give you a pass on your obligations.
I’m fine with paying for expenditures, but not fine with the waste. A pair of goggles can be reused as can all kinds of tools and supplies. I had exactly the same thing happen to me as the person above. I had a 30k budget in mind for three related projects and they have just spent half of that budget on the first phase. It should have cost 5k and they sent me a bill for 12k. Ridiculous. I’m cutting my losses and will not work with those people again.
Do it yourself next time. See how ell that works for you. YOU signed a contract that wasn’t in your favor. Why blame someone else?
Thank you MAC, I am a general contractor and when I put costs together all of those items goes into the price I need to get to do the job. We have very expensive workmans comp, very expensive liability insurance, very expensive auto insurance just to be able to bid on projects not to mention actually purchasing man power and materials. Then there’s tax on all of that. This is a business that needs capitol to run and stay in business to be able to offer guarantees.
Same thing happened to me. I’m being cheated–they were taking much too much time drawing out the process. My materials cost 700 dollars but the labor was about 8k!!! And then the markup was another 15 per cent. Ridiculous.
what’s a standard defect liability period for a cost plus contract?
one year
Cost plus contract meaning labour cost plus materials ? That’s the way it should be customer buys materials he wants installed and make contract that explains how much the labour will cost
Cost Plus is allowable contract (direct) cost plus allowable (indirect) cost and fees on those costs, per the contract documents.
Cost plus a fee contracts are done for one reason. There are no details before the contractors are picked. If they had true specifications and drawings every home builder in the country would be doing fixed price. Owners don’t want to pay for up front costs when they have no idea if they can even afford the home they are specifying. Owners have no idea how long things are going to take and what they will actually cost. They hand us five sheets of paper at the beginning and ask how much the job will cost. They also ask three other guys. The low “bid” gets the job. In order to get the job, you have to assume the cheapest alternatives not specified or else you will be higher than everyone else. In order to cover yourself, you end up specifying in extreme detail the entire job for free, so you explain the overruns later. At this point, it goes back to the drawing board 80% of the time for a “redesign”, because the costs were too high regardless. Often times they don’t even pick a builder. The architect gets more fee for the redesign and the process repeats. To circumvent this problem, contractors settle for a cost plus and then do the job of the architect throughout the job constantly pushing for decisions to be made, so the project goes smoothly. In the end, we get blamed for the “slippage” and overruns, while the architect gets fees for multiple redesigns and the owner/architect struggle to make decisions. The best way to pick a contractor is to do it regardless of the plans or “bid”. Negotiate the overhead and markup and then ask for random invoices or time sheets throughout the project. This will ensure they are giving you an accurate estimate and keep them honest will billing. We also have offered cost plus a fixed fee contracts. This fixes the oh&P, but allows us to transfer the costs through. No incentive to buy more expensive materials or take longer this way because we get more on a percentage basis if we are faster and under the estimate.
My question is not covered by the information which otherwise is very informative.
If my contractor set up the cost plus 10% and he asked me to pay a sub contractor immediately after the work was done——and also to pay a merchant for a product as soon as it was installed—-can he count the full value of both these situations and also 10% of their costs ?
Since I paid for them up front they are not the contractors costs because he asked me to pay for them.
Therefore he should claim only 10& of the two costs on his expenses. Am I correct?
Thank you.
I have never understood how a customer accepts a “cost plus” price blindly. i always give a full breakdown estimate with the following rider
“This estimate does not include unforseeable concerns that may show up during scheduled work.
Concerns will be brought to your attention ASAP, code and safety violations MUST be addressed.
All other concerns are optional at your discretion.”
in 7 years i have only had to use this once as a basement suite “clean-up” revealed an entire suite built with 3 foot and shorter scrap lumber and live wiring left loose in the walls all over the place required a full gut and rebuild.
31. Consider that when a GC works under a cost plus contract it does not necessarily mean that his/ her subs are working from a cost plus position. The reality of what happens here is the GC may get a little “lazy” with regards to how they manage the project knowing that they are supposed to be getting paid for all their time, etc… What happens when one of the subs is not performing as desired and causing delays? Delays that under a typical construction contract would have the GC dismissing that sub because it is slowing the project down too much. Since the GC is getting paid for each visit to the site, the normal urge to keep the speed going is not quite the same for him, but the subs are still working off a “fixed fee” basis and this slow pace is hurting them more. They are the ones suffering and loosing money. This suffering by your subs in turn causes them to reconsider your skills as a GC potentially impacting your long term relationships. Additionally this will cause the client to pay more money for the project than they should have to.
I know some plumbers that hate to give a price but they want to do the job then bill its usually very high I always ask them the price 1st.
I agree 100% cost plus is nothing but trouble waiting to happen.
I give allowances on certain mechanicals electric x dollars built in to cover unseen wiring changes. “To be billed to customer as per invoice on the contract and the same on plumbing and heating.
Ill build in a close dollar cost and if its over for unseen reasons Ill tell them ist get a change order signed then do the extra work.
Your “partial” list of the pitfalls of Cost Plus type construction contracts is humorous, gut wrenching, and all too true.
However, your setup for the list, the ‘two major reasons’ that Contractors use them is really missing THE major reason. That reason is the lack of complete, comprehensive, plans and specifications at the start of construction.
The majority of ‘Architecturally Designed’ plans for a remodel in our area provide just enough information for the Building Dept. to approve a permit. This results in a design that is more concept than detail with the onus on the Owner and Contractor to work out all the details during the construction process, which is VERY inefficient.
Drywall finish? Oak or maple floors? Light fixture schedule? Cabinet style? Countertop material? Backsplash? Casing style? Paint colors? Tile design? Plumbing fixtures? Well, we’ll just decide on those when the time comes.
The Owners believe that they have already paid for design because they have a building permit, so, what is the cost of this job?
I don’t know, but be sure to ‘verify with existing’.