The other day, I read a business forum post (not just construction) that put a slightly different perspective on Cost Plus contracts. It said:
Cost Plus Pricing: This takes the cost of producing your product or service and adds an amount that you need to make a profit. This is usually expressed as a percentage of the cost.
It is generally more suited to businesses that deal with large volumes or which operate in markets dominated by competition on price.
This post brings to light two more good reasons why Cost Plus contracts should be avoided.
- Many construction-related business might consider $250,000 or even $1M a large contract, but in the larger sphere of business, these sums are peanuts. Look at the sales of companies like GM, Dell, Microsoft, Wal-Mart, etc. Using the definition of the post above, Cost Plus is not suited for construction work.
- Competing on price is financial suicide in any construction-related business, as so many are finding out right now. I give you the lowest price, and I win? That’s not how it works.
Lowest price doesn’t win, and cost plus doesn’t win. Learn how to estimate your jobs, then compile a fixed-price contract so the homeowner knows what you will do, you know what you will do, and everyone knows how much it will cost before you get started. That’s the smartest route to long-term success.