Cost Plus vs. Fixed Price

I recently had the opportunity to discuss with a friend the merits of “cost plus pricing” versus “fixed cost pricing” when it comes to building a custom home.

At Integrity Home and Cottage we have taken the position that “Fixed Pricing “ is in the best interests of the customer and also in the bests interests of Integrity Home and Cottage.

We believe that a customer that has “the right home or cottage at the right budget” is truly a happy and satisfied customer. Cost overruns, no matter who asked for the change, are a certain recipe for a dissatisfied customer.  

We believe happy and satisfied customers are our most effective marketing tool!

My friend recently related his experience with “cost plus” pricing and only reinforced our belief in fixed pricing.  My friends’ recent build was a large and very nice project. HE worked with a local build to guide and execute the project.  The budget was significant at 600 K and the mandate was to build a large and luxurious cottage.

In order to keep his costs down, and prevent the builder from gouging him, my friend entered into a ”cost plus” arrangement. Full transparency, and he would know if the builder was gouging him and through “margin management” his budget would be managed. In his words “boy was he wrong!”

Focus on margin and not overall budget led to the project costs ballooning to over a million dollars. Project margin percentage was constant, the builders profits on the job certainly soared beyond the original profit tally. 

Costs plus margin, equals total budget. If you can’t move the margin number, maybe the “cost” piece of the equation can be changed.  In this kind of arrangement it often does. It can and it did with my friend.

My friend gave me an example where the arrangement failed him.

The design offered a terrific view of the lake and my friend wanted the biggest window that could technically fit in the space facing the lake. The builder accommodated and provided the largest window that could technically fit in the space. He provided a custom window that was three inches larger than the available “stock window”. The cost differential for the custom window and the “stock” window was counted in thousands of dollars. My friend only found out about the stock window after the fact.  The builder was not “cost conscious”. It could easily be concluded that the builder is incented to always offer the most expensive solution in order to maximize his profits on the job.

This is just one example, my friend had many examples to share. So many that the project costs increased by 400K .

Our position is that “cost plus “ does not align client and builder to deliver the “right building at the right budget”.  Fixed pricing is based upon an understanding of the nature of the work and a committed price for the work required.

With a fixed price arrangement the budget is clearly established, project scope is properly articulated and the mandate given is “to build the specified house, at the contracted budget”.  It requires more work for builder and client upfront in developing scope and budget and pricing but it puts client and builder on the same side of controlling costs, not just margin.

Building a home or cottage is a major endeavour that needs appropriate planning, the right contractual arrangement and a builder that is committed to proper project management. 

Margin is important but budget management is more important!