New Home Construction Agreement Cost Plus: What You Need to Know
If you`re planning to build a new home, you`ll need to sign a construction agreement with your builder. One option is the cost-plus agreement. In this type of agreement, the builder charges you for the actual cost of labor and materials, plus an agreed-upon percentage as profit. This article will explain what cost-plus agreements are, their advantages and disadvantages, and what you need to consider before signing one.
What is a Cost-Plus Agreement?
A cost-plus agreement is a contract between you and your builder that specifies that you will pay the actual expenses incurred during the construction process, plus a markup for the builder. The markup can be a fixed percentage of the total cost or a variable percentage depending on the builder`s costs. This type of agreement is different from a fixed-price agreement, where the builder quotes a fixed price for the project upfront, and you pay that amount, regardless of any changes in costs during the construction process.
Advantages of a Cost-Plus Agreement
One advantage of a cost-plus agreement is that it provides transparency in the construction process. You have a clear understanding of the actual cost of labor and materials, and you can see where your money is going. This type of agreement also allows you to make changes to the construction plan during the process without having to renegotiate the contract. A cost-plus agreement also ensures that the builder is incentivized to keep costs low since their profit is directly tied to the project`s expenses.
Disadvantages of a Cost-Plus Agreement
The biggest disadvantage of a cost-plus agreement is that it can be challenging to predict the total cost of a project. Since the final cost depends on the actual expenses incurred during the construction process, it can be challenging to budget for the project effectively. Moreover, if the builder`s costs increase significantly during the construction process, your final costs will also increase, making it harder for you to stay within your budget.
What to Consider Before Signing a Cost-Plus Agreement
Before signing a cost-plus agreement, there are a few important factors you need to consider. First, you need to make sure that the builder is reputable and transparent with their costs. Check their references and previous works to ensure they have a history of delivering high-quality work within budget. Additionally, you should negotiate the markup percentage with the builder to ensure that the profit is reasonable and fair. Finally, you’ll want to specify how changes to the construction plan will affect the final costs and have a contingency budget in case of unexpected expenses.
Conclusion
A cost-plus agreement can be a viable option if you`re planning to build a new home. It provides transparency in the construction process and allows you to make changes during the process without renegotiating the contract. However, it also has disadvantages, such as unpredictable costs and potential price increases. Before signing a cost-plus agreement, make sure you consider the builder`s reputation, negotiate the markup percentage, and have a contingency budget in place. By doing so, you can ensure a successful construction project that meets your budget and achieves your dream home.