Just as there are different building projects, there are also different building contracts – each designed to ensure everyone’s rights and responsibilities are covered. Choosing the wrong one could prove perilous for your project and your wallet.
Not all building contracts are created equally
The most common type of contract – the fixed price contract – is typically used for domestic builds. Knowing the fixed price of construction upfront gives the home owner a degree of certainty. The same cannot be said of cost plus contracts where the builder passes on the cost of materials and services throughout the process of the build (cost) to the owner and charges a margin for overheads and profit (plus). The price uncertainty that comes with a cost plus contract is one of its biggest pitfalls that can end with disastrous consequences, and at worse, litigation.
Is the risk worth the benefits?
A cost plus contract has its place, particularly in the commercial or civil works sector. It is commonly used when the scope of the project is too complex to define or is too difficult for the contractor to provide a detailed estimate before work begins. The contractor can still begin the project knowing their expenses will be paid and the owner only pays for the work that is undertaken.
If it sounds like the arrangement is skewed toward the contractor and leaves the owner to bear an unequal burden, you’re right. In fact, the owner is expected to trust that the contractor will act responsibly – and ethically.
The devil is in the detail
A cost plus arrangement does not mean contractors are entitled to open slather. They must justify their costs by showing invoices or evidence of expenditure. Unfortunately, in order to make a profit, contractors have been known to collude with suppliers and subcontractors to inflate invoices in order to boost their margin – a kind of ‘you scratch my back, I’ll scratch yours’ arrangement.
Too many disputes stemming from cost plus contracts end in litigation and interestingly, the victims aren’t those you would expect. Cost plus contracts are typically used for big budget, high-end projects spearheaded by well-educated and experienced owners. But these owners are also time poor and are keen to get their project underway which could make them susceptible to a contractor’s hard sell – the type that pressures you to sign a contract because it will save you money in the end. The reality is, costs will blow out when there is no set budget to begin with.
It’s not all bad news
The only way to avoid a contract dispute is to do your due diligence. Firstly, never sign a cost plus contract for a residential build. A fixed price arrangement will motivate your builder to stay on track and on budget. Secondly, have your contract reviewed by the experts: a solicitor as well as by a building specialist, such as SJN Building Consultants.
We regularly review building contracts to warn owners of the pitfalls, how to circumvent the risks and avoid litigation – before they sign and while we can still protect their interests.
The small price you pay to have the veracity of your contract checked before the project begins could be worth every cent.