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.

Mick Irvine, Amaze Buildings
“ProCalc saves heaps of time it’s a game changer ! Making project feasibility faster and clearer for both me and my clients. It streamlined early decisions and sets realistic expectations from the start.”
Mick Irvine, Amaze Buildings

If you found this information helpful, you might also like the Builders Webinar: Correct Pricing? 6 Pricing Mistakes Builders Make

Book a free ProCalc Trial

You Might Also Like:

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.

6 Builder Hacks to Stop Wasting Time.

Wasting time wasn’t part of the plan. But it’s probably happening. You’re flat out. Quoting. Chasing clients. Solving problems. Maybe try this….

10 First Meeting Screw Ups that Cost Builders

Your first meeting with a prospective client sets up the success of a project. Get it right and you grow profits with happier jobs. Get it wrong and you’re in for a world of pain…

Tired of losing jobs you quote?

It’s not until you analyse your quoting system for time and money wasted that you realise how costly a ‘leaky’ quoting process is. Here’s how to quote ONLY the jobs you’ll win…

5 Hidden Costs to Builders When “Clients Supply” Fixtures

It can feel awkward turning down the client’s request to supply fixtures – especially if you haven’t yet won the job. What to do…

Best Business Podcasts/Videos for Builders

Checkout these hand-picked podcast/video series for builders to help you grow your vision, your business, your profits and your team – successfully.

Builders Roadmap: Increase Margins & Prices in Competitive Markets

This is NOT advice about reducing costs & overheads in competitive times. Rather, it’s strategic advice about how to fast track bigger profits in a competitive environment based on what successful home builders do.

Builders, are you the victim or the victor?

In tough times, it’s easy for builders to feel helpless with no control over their future. See how attitude has helped builders not just survive but flourish in tough conditions.

5 Warning Signs Mistrust is Killing Your Sales

If clients don’t trust you, they’re unlikely to engage your services. Here are 5 signs to look for – and what to do.

10 Simple Rules to Make Builders’ Lives Easier

Building’s a challenging game to play so we’ve compiled 10 simple rules to make every builder’s life easier (from hundreds of builders we interviewed)

5 Client Fear-Driven Tricks That Hurt Builders

Clients start the project process at a disadvantage because they’re on a steep learning curve. Through fear, some of them employ ‘newbie’ tricks. Here’s how to help them.