A Fixed Price Construction Agreement Is The Only Way To Stay On Budget



A client recently asked one of our architect partners the following question:
“Could you ask to see the receipts so we know they aren’t cheating me on the purchases? They are not 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 will need a simple table like New Avenue uses in our Budget Page.   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 works, I have attached two pictures.  One is for a roof.  This shows an original budget of $4,500.  In this example, the roof is already on.  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”.
 Shingles and Shakes Budget - Roof
The second shows the windows and doors.  This changed via a change order the client approved.  The client ended up selecting nicer quality windows that cost more than was budgeted for the windows shown in the architectural plans.   In this example, the 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 this and approved it. In this case, the contractor was under contract to purchase and install the windows in the architectural 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, the contractor bought them and installed them. No one was surprised and everyone was happy:)   This is fairly common.
Windows and Doors Budget
You can review every line item in a budget.  To do so is a matter of reviewing the budget line by line to see what has changed.  Using our system, there isn’t any way for a contractor to charge you more than was budgeted unless the client approves a change.
Auditing receipts is not something that we expect any architect or client to bother with.  We realized years ago that tracking receipts is not helpful in getting fair pricing or managing a budget.  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 & 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 towards overhead, profit, insurance or anything else that the general contractor has to pay for.   Even in a Time & Materials contract, clients do not see this markup.
Auditing the materials purchased is nearly impossible.  Some materials are supplied by subcontractors, some are bought directly by the contractors.  If a contractor wants to cheat they can always buy extra materials and return some of it. It’s impractical and even impossible to follow this. Your best strategy is to hire someone you trust and pay them what they bid.  Then leave it at that.
We have found that the best practice in the industry is a fixed price budget and that is what we insist on for any project where the owner has a budget in mind… and that’s almost every project.
Now, even if you’re a Silicon Valley or Hedge Fund billionaire that has no budget, and you want to create a work of art, and you want Time & Materials then we still insist on starting with a fixed price budget and then approving change orderes for any changes.  It’s better for us too when we have a process, a contract and expectations set at the start.
Sign up to see example budgets, example floor plans, or to use the New Avenue system for free here: Get Started

 

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