Cost-Plus Construction Contracts
The most common method to secure a relationship between a Builder/General Contractors and a customer in the Roaring Fork Valley is a “Cost-Plus Construction Agreement/Contract.”
The purpose of the Cost-Plus Construction Agreement is to minimize risk for all parties involved in a construction project including, most importantly, the customer. The agreement also protects the builder and all the subcontractors + suppliers involved in a project. Also included in the agreement are Plans/Specs and a detailed Project Budget. An architect normally supplies the Plans and Specs, and the builder provides the Project Budget. These three documents – 1. the Cost-Plus Construction Agreement, 2. the Plans & Specs and 3. the Project Budget – are all reviewed, agreed upon and signed before work begins on any new project.
Regarding the estimate aka the Project Budget, the Builder provides an estimate to the client for all the work to be performed. This estimate normally includes a weekly fee for managing the project. This fee is called the Project Management fee. Once the actual cost of the project is determined, the Builder adds his General Contractor (GC) fee to the bottom line. The GC fee is also referred to as the Builder’s profit and overhead.
The GC Fee is a percentage of the total project cost (including the estimated Project Management fee). This percentage is normally between 10-20%.
- A lower GC fee structure applies to larger jobs including new construction, and projects where the scope of work is very clearly defined.
- A higher GC fee applies to more complex jobs, smaller jobs, and jobs where the scope of work is not clearly defined.
Lastly, general contractors like McSwain Builders pass on the cost of General Liability Insurance to their customers. Insurance is a percentage of the total job cost, and it normally falls between 1.5% and 2% of the total project cost.
Sample Deal Structure for a Cost-Plus Construction Contract:
Below is an example of how a cost plus deal structure works with sample assumptions:
- The actual cost of construction aka sticks, bricks and labor is $500,000
- The cost to manage the project is $1,500 weekly and the project duration is six months (6 months x 4.3 weeks/month x $1,500): $38,700
- McSwain Builders has agreed to a 15% GC fee (15% of total project cost): $80,805
- General Liability Insurance (2% of total project cost): $10,774
Total Contract Amount: $630,279
Very few projects are completed without at least a few changes to the original scope of work. When changes occur, the specific costs associated with the change order are estimated before the work occurs. The customer is then presented with a simple document identifying the change order and the cost(s) associated with the change. The customer is required to sign the change order and return that document to the Builder before work for the change order starts and/or before parts/materials are ordered. Builders markup change orders just like they mark up the cost of construction.
Here’s an example:
- Change from oak hardwood flooring to walnut hardwood flooring: $4,500
- GC Fee (15%) $675
- Insurance (2%) $90
Total cost of change order: $5,265
Additional budget for Project Management is sometimes added to the cost of a change order depending on the complexity of the change order and how subs, suppliers and overall schedule will be impacted. Assuming the change results in more time needed to complete the overall project than what was estimated on the original Project Budget, it is safe to assume that additional budget for Project Management will be added to the cost of the change order.
Estimates the Cost of Your Project: Preliminary Budgets vs. Final Project Budget
McSwain Builders is very experienced at creating budgets/estimates for new projects. In most cases, McSwain Builders uses its own proprietary database of actual costs on numerous prior projects to create preliminary budgets for new projects. McSwain Builders’s preliminary budgets normally fall between 7-15% of final, completed project cost. These budgets can be produced quickly. You will not have to wait weeks or months. Providing prospects and future clients with solid, realistic project cost data early in the construction/design process helps clients make intelligent decisions about the size and scope of their new projects.
When the preliminary budget has been reviewed and agreed upon by both Builder and Client, a Pre-Construction Services Agreement is usually signed and agreed upon between Builder and Client.This simple agreement gives the Builder a reasonable budget to secure formal bids for the project, and it formalizes the process for how the Builder is paid for their time for project specific estimating as well as project planning.
Once specific takeoffs have been completed, formal bids for each piece of the project have been obtained, and customer selections have been made, McSwain Builders takes this info, weaves it into the Preliminary Project Budget, and a Final Project Budget is born. This Final Budget becomes part of the Cost-Plus Construction Contract that formalizes and guides the relationship between McSwain Builders and our clients.
The Roaring Fork Valley Construction Market
McSwain Builders and its leadership team have been actively building in the Roaring Fork Valley (and other markets) since 1996. Since then, we have experienced many ups and downs in our business and our industry. These experiences have shaped who we are today.
We are a lean and mean custom builder focused on manifesting our clients’ dreams. McSwain Builders is proud of what we have created, and the glowing reviews from the vast majority of our past clients says we’re doing something very well.
Given the strength of the local market and the number of great projects presented to McSwain Builders, we are in the unique and fortunate position of being able to choose our clients. This means we will not bid on each and every project presented to McSwain Builders. We choose the projects and the customers who we believe will be easy to deal with, those who are appreciative of what McSwain Builders uniquely offers, clients who are able to make timely decisions, and those having a realistic budget.
Demand has never been higher for good builders in the Roaring Fork Valley. Demand has never been higher for skilled tradesmen and subcontractors. Material costs for lumber, millwork, fasteners, concrete, sheetrock, doors/windows, electric wire, lighting controls, plumbing supplies and fixtures and HVAC systems/supplies increases in price every year without fail.
The positive side of this reality is that in most cases, the supplies, tools, materials and equipment used on TMC projects are all of exceptional quality and dependability. The downside is prices continue to increase.
The high demand for good builders/construction workers, coupled with the low supply good builders/construction workers, results in prices for labor that are higher than most all other markets. Also, the local weather (and the extreme fluctuations in temperature), that are part of everyday life here in the RFV, translate into unique construction materials and methods, and challenging local building regulations that also drive up local construction costs.
This means it will cost more to build your house, more to renovate a house, more to build a new addition and more to remodel a kitchen here in the Roaring Fork Valley than almost any other market in the US. The high cost of construction (and the high cost of everyday life) is simply the reality of living in the Roaring Fork Valley.
People don’t live here because it’s affordable. People live here because the quality of life is off the charts, and most “locals” make countless sacrifices that enable us to live in the amazing Valley while still putting food on the table for our families.