A Fixed-Price Construction Agreement Is the Only Way to Stay on Budget
A client recently came to our partner designer, concerned about losing money to discrepancies between the budget and the actual costs of the project.
"Could you ask to see the receipts so we know the contractors aren’t cheating me on the purchases?" the client asked. "They aren't supposed to make a profit on the purchases, but they do make a profit where it says 'profit' in the budget."
If you want to compare a project budget to the actual cost, you'll need a simple table like New Avenue uses. Anyone on your team can look at the budget tab on your project page by signing into newavenuehomes.com.
To give an example of how budgeting and cost changes work, I have attached two images.
The first shows the budget and costs for a roof. This shows an original budget of $4,500. In this example, the project has been completed. The budget for the roof has not changed; it is now 100% complete, and you can see that the client paid $4,500. That is completed "on budget."
The second image shows the budget and costs for windows and doors. This changed via a change order the client approved. The client ended up selecting nicer quality windows that cost more than the windows shown in the plans. In this example, the original bid was $4,700. The windows selected were $7,914.58. The contractor provided a change order on the New Avenue budget page, and the client reviewed and approved it.
In this case, the contractor was under contract to purchase and install the windows in the plans for the $4,700 bid. The owner shopped around and chose nicer windows that cost $3,214.58 more than the specified windows. The owner chose nicer windows, and the contractor bought and installed them. No one was surprised, and everyone was happy. Changes like this are fairly common.
Avoid these common pitfalls and protect yourself from overages.
It is possible to keep your project on budget; you just have to choose the right system. Here are some ways that look good on paper but end up being impractical:
Some clients choose to audit receipts, but it's just not effective. Auditing receipts is not something that we expect any designer or client to bother with. We realized years ago that tracking receipts is not helpful in getting fair pricing or managing a budget. Auditing the materials purchased is nearly impossible. Some materials are supplied by subcontractors and some are bought directly by the contractors. If a contractor wants to cheat, they can always buy extra materials and return some of them. It's impractical and even impossible to track this. Your best strategy is to hire someone you trust, pay them what they bid, and leave it at that.
Another option is a time and materials contract, but the overages tend to be high. A time and materials contract is one where the client pays for all labor and materials plus a markup for overhead and profit. You do see all receipts in this type of contract. This markup is typically 15%. We don't do that type of contract because it consistently leads to 100% overages. A time and materials contract shifts the responsibility to track expenses and manage the budget from the contractor to you—the homeowner. Every contractor marks up portions of the materials and labor; that is simply how the industry works. For example, a time and materials contract may have the contractor showing laborers at $35/hour when they actually pay them $20/hour. The difference is a markup that goes toward overhead, profit, insurance, or anything else that the general contractor has to pay for. Even in a time and materials contract, clients do not see the details of this markup.
That's why New Avenue uses fixed-price budgets that protect the client. We have found that the best practice in the industry is a fixed-price budget. In fact, we insist on it for any project where the owner has a budget in mind . . . and that's almost every project. Using our system, there's no need for you to constantly review every line in the budget because there isn't any way for a contractor to charge you more than was budgeted unless you approve a change.
Now, even if you're a Silicon-Valley or hedge-fund billionaire that has no budget and wants to create a work of art, we still insist on starting with a fixed-price budget and using change orders for any changes. It's better for everyone involved when you have a process, a contract, and expectations set at the start.
Schedule your call to discuss your project and get your questions answered.
