It’s the age-old, crucial question of building projects, the bottom line that existed before anyone ever used that phrase. What is it going to cost overall? The world of building projects is littered with jobs that went way over budget, but there are also countless examples of projects that went through without a hitch.
Perhaps what makes all the difference is the clients’ potential financial vulnerability. Whoever commissioned the building of the Taj Mahal was not short of money, although they may well have reached that stage of stability by watching the pennies as a matter of course.
For many individuals having a house built, this is the biggest financial commitment of their life, and it makes people nervous. Yes, the bank will lend you the money, but only an agreed sum, so if the whole thing spirals out of control, you could end up in trouble.
But spare a thought for the builders. In almost all cases, they are good people doing their best to provide a quality service. They are not out to stitch anyone up. What the situation needs is a contract that protects everyone’s interests.
As the client, you’ve gone through the ideas stage, identified what you want, and maybe got some design help and ideas from the contractor. Now you’ve got a budget to stick to, but obtaining a definite figure to work with can be hard, because that means somebody has to commit themselves, and in a world full of “what ifs”, they don’t want to do that.
But you are the customer, the client, without whom there is no job, so you have certain rights, and one of them is to know how much money you need to have available.
Defining the Contract Types: What is Included in Fixed Price vs. Cost-Plus
A fixed price building contract is what the words suggest it is: this is the price the client is going to have to pay in total. It is what the contractor will receive when the work is finished. Ultimately, this is what any contract is all about, so why should there be any other kind of arrangement?
Because of those “what-ifs”, that’s why. Because things happen. Prices change due to market fluctuations in the price of raw materials. Issues occur that have to be dealt with and paid for. What looked like a straightforward job can become more complicated, and this is all translated into dollars.
This is when people can fall out, when relationships become strained. From the outside, when we are not directly involved, it is easy to see both sides of the coin. If a project is absolutely nailed down, has been researched and planned thoroughly, so there is no foreseeable reason why the total should grow, then great: in an ideal world, fixed price contracts are the obvious choice. The trouble comes with that word foreseeable. Life is not like that.
An alternative to the fixed price contract is the cost-plus version. This allows contractors to pass on the actual costs they have had to shoulder, plus a fee. Typically, this would be the preferred option of the contractor, because it covers them in the event of any nasty surprise occurring.
Cost-plus is made up of direct costs, indirect costs and the contractor’s fee. The first consists of materials, labour and factors such as rental of specialist equipment. The second refers to administrative costs such as permits and insurance. These costs push up the total while no one is laying a brick or driving a digger. It’s just things that have to be done on paper, on a computer and by phone.
The contractor’s fee is their profit and can be worked out in various ways, from a straightforward percentage of the costs they have shelled out to more complex calculations incorporating some flexibility due to the unpredictability of the whole business of construction.
Risk vs. Certainty: Weighing Potential Savings Against Budget Security
When such large sums of money are involved, gambling and hoping for the best are not attractive options. That is why clients tend to favour fixed price contracts. Therefore, a contractor may offer incentives in terms of potential savings in exchange for some flexibility.
The Role of Provisional Sums (PS) and Prime Cost (PC) Items in Each Contract
A provisional sum is the predicted or estimated cost of an item in the contract and can refer to anything from specialist equipment needed because ground conditions are problematic to changes needed in design, which only become clear once the project is underway.
Prime cost (PC) items are down to the client. This refers to fixtures and fittings that have not been specified in advance and are only decided at a later date.
Transparency and Communication: How Each Contract Affects the Client-Builder Relationship
With the ever-present possibility of deviations from the plan, it is vitally important that the client and contractor are clear about what they are committing themselves to. Transparency is the basis of any good agreement, and the old saying that a good deal is one that benefits both parties holds true here. Both sides need to be aware of how the bottom line may change and be prepared to deal with it if it doesn’t go their way. Is it better for the client to go fixed-price at a premium or cost-plus with fingers crossed? A lot can depend on the perceived simplicity or complexity of the project.
What nobody wants is a Cold War situation. Ultimately, both parties want the same thing: a successful project brought in on time and on budget, with the client’s wishes satisfied and the contractor’s reputation enhanced.
Happily, the majority of projects are accomplished to everyone’s satisfaction. Clients always want to spend as little as possible, but a reasonable attitude that comes from understanding the possible deviations from the script can make the relationship a more pleasant one. Similarly, contractors are just trying to make a living, and if they are realistic in their calculations and upfront about potential issues, then everyone knows where they stand.
At Enso Homes, good working relationships are a key part of our process, and we work closely with you along the way to ensure your custom home dream is brought to life. For more information about pricing and contracts, check out our frequently asked questions or get in touch with our team here for more information about our business.
