Cost+ Contracts – The Good, The Bad & The Ugly
Roughly 1 in 8 builders currently use Cost+ contracts; primarily to manage cost escalation risks.
We reveal their pros/cons – which might surprise you…
With dramatic materials and labour cost escalations, more builders are using cost+ contracts with their clients in an effort to avoid cashflow dramas.
We’ve done some research around this to further explore the advantages and disadvantages based on our Aussie builders’ research and overseas trends – so you can better understand the right contract for your business.
Keep in mind, each state has their own regulations around Cost+ contracts that you can obtain from your state’s building authority.
This article deals with the business side of Cost+ contracts.
>>>The Advantages of Cost+
1. Cost escalations of materials and labour – if you’re fearful of cost escalations you can’t foresee, cost+ contracts can minimise this risk
2. Flexibility to cater for scope changes – if you’re OK with (or anticipate) multiple scope changes throughout the build – great.
3. Easier materials/labour procurement – Can be easier/faster for the builder with less focus on costs
>>>Disadvantages of Cost+
1. Administrative burden on builder – you’re obliged to be totally transparent with all costs for materials and labour so you have to tightly track your expenditure
What Builders Say About ProCalc – Book Your Free Trial
“I now avoid time wasters in my business and focus on margin growth for profitable jobs. ProCalc saves me stacks of time and enables me to avoid under-quoting, too.”
Josh Dodd, Registered Builder
.
2. Clients will still want to understand the ‘likely’ cost before they agree to progress their project (you can do this with ProCalc. Book a free trial)
3. Cost + contracts attract more disputes – in fact, overseas research suggests Cost+ contracts are 3 times more likely to fall into dispute than fixed price contracts.
Areas ripe for dispute include:
- Some clients will dispute the inclusion of project management time, site set up and other costs related to the work they didn’t anticipate
- Higher likelihood that clients will run out of money before job is complete due to multiple changes and/or looser financial controls
- Clients challenging practices they regard as ‘wasteful’ or double dipping such as extended work breaks or waste from another job going into their job bin
- Greater bureaucracy, paperwork and meetings every time you wish to be paid for your work to iron out and misunderstandings. Who pays for that time?
- Who pays for errors, delays or omissions in plans and engineering?
- Less effort goes into costing the job by the builder meaning the original ball park cost from the builder is often under-cooked (unless you’re using ProCalc)
As you can see, while Cost+ contracts appear to require less management, they tend to run most smoothly when a builder has fully prepared a client for almost every contingency with guidelines on when and how charges will be applied.
Some builders we spoke to do a great job of this, but many don’t have the record keeping, preparatory information and jobs systems in place that they’ll need to prevent risks of a dispute.
In conclusion, if you don’t have water-tight process in place, it seems most builders are best served with fixed price contracts to reduce disputes and dramas.
If you found this information helpful, you might also like the Builders Webinar: Correct Pricing? 6 Pricing Mistakes Builders Make
You Might Also Like:
- Builders, Get Your Pricing Right Every-time – No More Under-Quoting
- Transform Your Building Business in 43 Mins (webinar)
- How (& Why) to Charge for First Client Meetings
- Take a Free Trial of ProCalc
- Stop All Free Client Meetings – Charge Upfront
- Want more tips like these? Attend the Webinar: Work Smarter, Not Harder
Richard Armstrong is a former registered builder who recently interviewed hundreds of experienced Australian builders to identify how they best manage clients, budgets and profitability.
