Congratulations! You’re about to begin the home construction or renovation project you’ve been dreaming about. Perhaps you’ve already selected a contractor and have been exploring design ideas, material choices, and countless other details. Before a single board is cut, however, you and your builder must negotiate a contract that will include a payment schedule and time frame for completing the project. The type of contract you choose can affect the final cost, completion date, and your ultimate satisfaction with the finished product. According to Jim Catlin, Sales Manager for Woodmeister Master Builders, homeowners “have to establish the ground rules right in the beginning. Don’t assume that the contractor you’re dealing with is going to do things the way you’ve had them done in the past.”

Here is a breakdown of four basic types of contracts approved by the American Institute of Architects (AIA) and commonly used by contractors:

Cost Plus a Fee
One of the simplest types of contracts, Cost Plus a Fee means that the homeowner will be billed a predetermined fee, in addition to the contractor’s cost for completing the project. Those expenses will include labor, materials, sub-contractors, and general expenses (i.e. travel, lodging, sanitation, and trailer). The builder and homeowner negotiate a fee, or percentage, which will be added to the costs. Catlin says that with Cost Plus a Fee, “all the owner is obligated to know is, if the plumber shows up on the job and charges $5,000 to do the work, he or she is paying that $5,000 plus the predetermined fee. Period.”

Time and Materials
Time and Materials is very similar to Cost Plus a Fee. The difference is that with the former, specific bill rates are set for both labor and materials. For example, the designer will be billed at one rate, the project manager billed at another rate, and carpenters billed at yet another. According to Catlin, “those rates would include profit and overhead. So if carpenters are billed at $72/hour and you, as the customer, know that in that week we put 100 hours in, you know you’re getting a bill for $7,200.” In addition, there is a pre-established percentage added to materials and subcontractors with this type of contract. 

The advantage of Cost Plus a Fee and Time and Materials is that they can give the homeowner a feeling of more control over the costs since there won’t be any hidden mark-up charges. “It’s very open book; it’s right in front of you,” says Catlin, adding that it is a shared responsibility for both the client and the contractor to bring the job in on budget and within a time frame. The drawback, he explains, is “there’s no fiduciary responsibility for the contractor to get the project to come in to any budget or schedule. If it takes longer, it takes longer. If the guys work slower because of inefficiencies or whatever, the owner pays that.” 

Stipulated Sum
A Stipulated Sum contract is just that; the contractor provides an established price for completing the project, based on client-approved plans and specifications. Any subsequent variations to those initial details would be considered extra charges; however, when the project begins, the home owner knows what it is going to cost.

Guaranteed Maximum Price
Guaranteed Maximum Price is a combination of Cost Plus a Fee and Stipulated Sum. The contract specifies that the homeowner will be billed a predetermined rate on top of the construction costs, but there is a not-to-exceed amount applied to the project. This type of contract is still subject to changes from the original plan and specs.

According to Woodmeister’s Catlin, Stipulated Sum and Guaranteed Maximum Price contracts place responsibility on the contractor to perform as he has promised and put the owner in control of spending their money the way they choose. As an example, he explains “suppose the customer wants to change the flooring, say to mahogany throughout the house. The contractor should provide the homeowner with a formal change request, basically saying that he is requesting a certain change dollar value to perform this flooring change. The owner has the ability to accept or reject it. After reviewing the change request, they might say ‘That’s a little steeper than I thought, maybe we’ll just do mahogany on the first floor.’ ”

However, a pitfall to Stipulated Sum and Guaranteed Maximum Price is that if the builder realizes well into the job that his estimate was flawed and lower than it should’ve been, he may be tempted to compromise quality of workmanship and materials to decrease his loss. Catlin says Woodmeister avoids this by coming up with a control estimate at the beginning of a project, to set the customer’s expectations and give a picture of what the project will probably cost. “We then work through the design development part of the project, which includes finalizing the drawings, defining the parts and pieces of the job, and clarifying material choices, such as rugs, tiles, the level of detail, molding and cabinet work. All of that gets worked out through the design development phase, and at the end of that phase we like to turn the control estimate into a stipulated sum.”

The contract you choose will depend on your own comfort level and the degree of responsibility you want to assume for meeting the budget and schedule. Catlin says any of the four types of contracts can be satisfactory, if “you understand exactly how the contract works, how you’re going to be billed, and what you’re going to be billed for.” There’s one other important consideration, according to Catlin. “You have to have a contractor that you trust.”