Cost Plus Agreements

Plan Confidently, Build Transparently

2024-05-10Updated: 2024-05-22 Mountain View Builders

You've likely heard of Cost Plus agreements, but do you know what lies behind this term?

When you hire a custom home builder or general contractor, you sign a construction agreement for specific services defined in a written contract. This contract outlines the scope of work, materials, and components to be used, as well as how the contractor will be compensated.

The two most common types of building agreements are "Fixed Price" and "Cost Plus." Here at Mountain View Builders, we offer a unique hybrid construction agreement called "Cost-Plus with Contingency." This innovative system provides the financial planning perks of a "Fixed-Price" agreement alongside the transparency benefits of a "Cost Plus" agreement.

Here's a breakdown of each agreement, including our hybrid:

Typical Fixed Price Agreement

  • Pros
    - Upfront cost transparency. The home price is guaranteed by the builder.
    - Builders appreciate this agreement since it guarantees a minimum payment.

  • Cons
    Escalation/De-escalation: Fixed-price agreements often include an escalation clause to protect builders from rising costs. However, there's no de-escalation clause to reduce fees if material costs decrease.

    Overcharging on Supplies: Builders may cushion material and supply costs to protect themselves from price increases. If prices don't rise, the difference remains as profit.

    Overcharging on Labor: Builders may inflate labor costs due to labor shortages and demand. These extra costs are often passed to the homeowner.

    Quality of Materials and Labor: Fixed-price builders may opt for cheaper, lower-quality materials to increase profit, compromising the overall quality.

    Hidden Profits: Builders may hide profits in costs and charges, lacking transparency in their invoices.

Typical Cost-Plus Agreement

  • Pros
    - Transparent pricing where you see every invoice and have a say in the working budget.
    - You pay direct wholesale costs and an agreed profit margin.

  • Cons
    - Escalation without de-escalation provisions.
    - Potential for cost overruns.

Mountain View Builders Exclusive: Cost-Plus with Contingency

We provide a cost estimate plus a contingency reserve price—typically 5% to 10%—to lock your loan. This covers unexpected expenses, like increased material costs or higher-end components. Any extra cash left over lowers your principal loan amount.

Here's how our exclusive agreement benefits you:

  • Pros
    - Combines the financial planning perks of a "Fixed-Price" agreement with the transparency benefits of a "Cost Plus" agreement.
    - Includes a price de-escalation provision to protect against rising costs.
    - No hidden profits—every invoice is visible, and you only pay actual costs plus an agreed profit margin.

  • Cons
    - None!

Explanatory Discussion From The Builder

Cost-Plus or Fixed Price: which is better?

Custom home buyers often face this question. With potential price fluctuations, it's crucial to understand each model and how builders may manipulate these systems. Here's a look at the pitfalls of "Fixed Price" and the transparency of "Cost-Plus" agreements.

  • Fixed Price
    - Fixed-price agreements often have clauses allowing builders to raise prices for various reasons. Builders may cite material shortages, structural changes, or subcontractor availability as reasons to increase costs.
    - Builders use "Fixed Price" contracts to prevent buyers from accessing financial details.
    - Ensure you fully read and understand the contract, including allowances for the builder.

  • Cost-Plus
    - Cost-plus agreements should provide clients with full access to quotes and invoices.
    - Understand the agreed profit margin and verify that you pay only for agreed work.
    - Research builders to ensure their business model aligns with your transparency expectations.

Mountain View Builders offers an exclusive hybrid of a fixed-price and a cost-plus contract, providing the best of both worlds. Your contracted cost-to-build price is a fixed price, and it includes a de-escalation clause. If prices go down, so does your price. If prices go up, you will not pay more than your agreed contracted cost-to-build fixed price.

You get peace of mind knowing that the price won't exceed the fixed contract price, and if market conditions improve, your final cost-to-build price will decrease accordingly.