What Is Cost-Plus Pricing in Design-Build Construction?
What Is Cost-Plus Pricing—and How Does It Work in Design-Build Construction?
Cost-plus pricing is a straightforward way for a general contractor to build a bid for construction based on the cost of an item or service plus a fixed percentage markup. There are several ways GCs create bids, and cost-plus is one model worth understanding fully before you pick up the phone. We know renovation pricing is often confusing and we want to help break it down, so, this is how cost-plus works for us.
What does cost-plus actually mean?
Put simply, cost-plus construction means that you as the client pay for actual project costs, like labor, materials, subcontractor costs, plus a flat contractor markup. The markup covers our overhead and profit. This is different from a fixed-price or hard bid contract, where you would agree on one unchangeable price for a project. Cost-plus contracts allow us to have flexibility, transparency and, most importantly, the highest quality contractor at the best price possible.
Why does cost-plus make sense?
Well, we have to account for things like an evolving scope and surprises in the condition of the building or home. With fixed price contracts, the contractor needs to account for every single cost and “what if.” This means the total cost of a project is much higher overall. With cost-plus, we get transparency. If a trade comes in lower than the estimate, the cost-plus contract is flexible to account for that. In a fixed price contract, the price the client pays wouldn’t change. Cost-plus makes sense because you only pay for the “what ifs” if they actually happen. That’s what our flex fund is designed for.
We didn’t choose this pricing model just because it sounds good. Over hundreds of construction projects, cost-plus pricing has allowed us to complete projects that make our clients happy with the process and the outcome. This model is geared toward professionals and clients who want their construction project done right the first time.
It’s important to know that cost-plus doesn’t mean a contractor has a blank check. We’re still working within our client’s budget and you receive an estimated project cost upfront. Line items and markup structure are clearly shown on each invoice. You’ll know exactly what you’re paying for and how much it costs. We’re all about transparency!
How cost-plus fits into the design-build process
In design-build, we coordinate both design and construction rather than our clients hiring separate companies or contractors for each. Maurer Construction brings together the architects/engineers, designers and trades to complete a project. We have a whole video series that walks you through the design-build process—check it out here!
We start with a consultation to talk through your project in-depth. Then, we begin the preconstruction/design phase, working with designers, architects and engineers to create the drawings and plans for your project. Even during this phase, we’re working with your estimate in mind so that we can design a project that will be feasible to bring to life within your construction budget.
This part of the process is a separate cost from construction and happens before we are able to create a bid for the construction phase. It’s typically billed hourly. Once we have drawings in hand and a plan for the design, we’re able to create that cost-plus bid for construction.
What affects your renovation costs?
While cost-plus pricing is different from working on a time and materials basis, the time spent and materials chosen do matter for your renovation costs. Having a realistic budget range, knowing your priorities, and communicating your non-negotiables makes the design-build process smoother and less expensive overall.
Cost-plus works really well for design-build because it means we have a solid starting point to create an estimate thanks to the drawings, but it allows us the flexibility to address changes and issues as they come up. If you decide to add a feature or want different finishes, we’re able to make those changes.
What’s typically included in a cost-plus estimate?
What you’ll typically see on a cost-plus estimate is:
Subcontractors and labor, broken down by trade
Materials
Permit fees
Equipment rentals
These estimates are based on our knowledge and relationships built over the years. As a result, we’re able to lock in better pricing at material suppliers and include a quality guarantee. Our relationships with subcontractors means we can get trades on the job site quickly when needed. While a general contractor can feel like adding overhead, it’s really an investment in the project’s timeline, efficiency and cost-management. GC’s bring better pricing, better quality and guarantees. You can read our blog post here about why general contractors are worth the investment.
And sometimes, we don’t know what we don’t know and for those scenarios we use a flex fund (also known as a contingency). This is a bucket of money included in the estimate that isn’t initially assigned to a specific trade. It helps us address the what-ifs that inevitably arise when we get into construction, and allows us to make decisions efficiently so that we don’t waste time or money. The flex fund is usually around 10% of the total budget, and at the end of the project you will see a line item for exactly what the money was used for (if the money isn’t used, it’s returned to you). It isn’t for upgrades or small extras; it’s to help us mitigate unexpected issues on-site and keep your project on time and within budget.
Again, transparency is the key here! With cost-plus, you’re seeing these actual line items on an invoice, and you’ll know exactly what our markup is.
What to ask a contractor about their pricing model
Remodel pricing can be hard to understand and it’s normal to have questions. Here are some questions you can ask that any reputable contractor should be able to answer clearly:
How is your markup structured, and what does it cover?
Will I see actual invoices for materials and subcontractors?
Do you include a contingency/flex fund, and how is it handled if unused?
Under what circumstances would you recommend a fixed-price contract instead?
What happens if we need to make changes mid-project?
Potential clients who ask questions like this are a green flag for Maurer Construction! It shows an understanding of the nuances to pricing a large remodel or renovation job and makes sure we are both on the same page before moving forward.
Thinking about a renovation or remodel for your home or business? Let’s talk.
If you have a renovation project on your mind, a conversation with Maurer Construction can be a helpful way to get started. We can give you an initial sense of what you’re looking at cost-wise and see if it would be a good fit.
