Fixed Bid or Cost Plus? Sorting Out How Construction is Bid

Investing your life savings in a dream home is near the top of life’s fear factor scale. You don’t want to be taken advantage of, or waste money.

Oddly enough, the builder you select to construct your new timber home is fearful too. Their success is far from guaranteed, since transforming a raw building site into a warm and inviting home can be fraught with a host of challenges. The industry is awash in stories of contractors going out of business thanks to mismanagement, litigious clients or circumstances beyond their control.

Think builders are rich? A few are (even fewer in our new cratered economy). Many go broke because it’s so competitive and the risks so high. A builder’s gross profit margins run from eight percent to as high as 15 or even 20—but with many chances to lose every bit of it on each job.

You will be contracting with them to provide labor and materials in one of three ways. They are fixed bid, cost plus (also known as time and materials or an hourly rate) or a combination of the two. Which is better? That’s like asking whether a builder should arrive on the job site in a truck or a Harley. Each has advantages and disadvantages.

Fixed Bid

This is where you know exactly what it will cost build a home as specified for X amount of dollars by this date. In theory you get what you want, the contractor gets paid what they want and there are no surprises for either party (insert big laugh here).

Pro: The more straight forward the project, the easier it is to contract for a fixed bid. Plus, a contractor will be looking for the best deal on all materials to keep their bid competitive. Trade contractors, such as electricians, HVAC installers and plumbers, use fixed bids. The common contract clause is “per the plans, in place and to code.” Once it passes inspection, the trade contractor expects to be paid.

Con: Timber homes are often placed in rugged terrain. If you insist on a fixed bid from the builder, he or she will have to charge far more to cover a wide range of contingencies that may—or may not—crop up. Thus you may not get the most competitive price (meaning cheapest).

Cost Plus

A contractor will base their estimate on the amount of time and labor it will take to construct your home, plus a percentage markup on every material that goes into your home. This tactic is used on projects where costs are harder to predict. Many timber home builders use this formula, largely because there are so many unknowns in timber home construction. Your site could, for example, require dynamite or heavy equipment to remove bedrock to create the foundation—and that’s only one stage of construction.

Pro: If you and your builder keep track of your budget and avoid change orders, this can be the most competitively priced way to get your home built.
Con: There is no incentive to do the job with any speed or wisely purchase materials, simply because the builder marks up everything that goes into the home.

Combo Deal

A combination of these two is increasingly common in timber home construction. Some parts of the house are done on a fixed bid, some on an hourly rate and other parts on a time and materials basis, plus a percentage.

Pro: If you invest your time in choosing cabinets, why should a builder take a percentage of their costs for just ordering them? A combination bid can help make the process easier for both builder and buyer, while building trust between both parties.
Con: Not all builders will offer this combination. Timber home builders are specialists and are rewarded for their experience and expertise. If you find a reputable one who is available (availability is likely increasing in this new economy), you may want to compensate them for their expertise in whatever manner they see fit.