Cost Plus Contract - $50K flat fee reasonable?

Well we've come across a Builder who does alot of Cost Plus contracts for Developers...his fees are $40K for 2 homes or $50K for 3 homes...

We've only ever done fixed priced contracts so not really sure if this is a reasonable commission or not.....any thoughts???
Hi Kim,

So you pay for his licence and profit for maximum 20k per house? What is his hourly rate? And how many sqm per house are we talking? :)
not sure what his hourly rate would be but it works out to be roughly $16,500 commission per house (we're building 3).

we get originals of all invoices from suppliers/trades and MYOB printouts at any time - to show he's not sneaking in a mark up here and there...

but i'm thinking fixed priced contracts would normally see a commission well above that right?? somewhere around the 20% mark??? have never really asked a builder how much his commission is because we normally only look at the build price and if it fits within our budget we're happy...but with cost plus its a bit of an 'unknown' but he claims all his Developer clients all use cost plus...always works out better....????

107m2 homes...fairly standard finihshing....
Do you have finance in place for the construction yet? As most lenders will not easily lend against a cost plus contract as they are open ended and often costs will blow out. Just something to think about.

he's able to do fixed priced contracts for bank purposes so all sorted there ;)

Sounds nice and risky...:rolleyes:

What happens if costs blow out and you run out of the bank's money, and can't afford to complete construction.

Or when the bank sends out a valuer to inspect prior to releasing a progress payment and things don't mach up to the payment schedule provided to the bank by the builder?

Or you experience delays for some unforseen reason, meanwhile the prices of materials and/or labour increase dramatically, thus increasing your expenses dramatically (see first point)

Just playing Devil's advocate here, but these are all very real risks...

I've never seen this arrangement before, but not very experienced with developing.

So is the builder basically working as a project manager and collecting his fee for organising all trades to do their part?
Obviously he would want to do the least possible to get the job done, as in no physical assistance.

As Boods just mentioned, what if something goes wrong?
What if the builder were to make a very costly mistake, and gets it rectified, all costing money. He can forward you all the trades invoices for the work, but are you willing to pay for it?
He could say to you, mistakes always happen, they are unavoidable.
All good points to consider. Kim, cost plus means that he gets the 16.5k no matter what happens. If he spends X hrs on the job he will charge you his time for being there - X times $hourly rate. If he drives into town to organise anyone or anything he will charge you his time. If he has to make phone calls he will charge you. These are all costs - not profit. You need to trust him to keep his hours accurately. As you say the materials and tradies bills will be clearly accounted for with receipts. I had a friend who built a house with this arrangement and the cost blew out incredibley.

Be well prepared as you don't have a contract to fall back on. It's very risky I feel. How are your profit margins if you go fixed price contract?

Take care, :)
my understanding of a cost plus contract is the $16,500/house fee i'm paying him is his fee for running around organising trades and making those necessary phone calls....he doesn't charge an hourly rate on top of that, thats all incorporated in his $16,500.

that $16,500 fee is also his margin for me using his trades to build the homes....he builds about 50 homes per year for Developers and so the trades are all set up, its just a matter of him telling them which job site to go to next.

so basically a cost plus contract means i pay whatever he gets charged by the tradies (at cost/wholesale price) + his commission which works out to be $16,500/house...thats it.

just spoke to another builder that offers similar service only to their developer clients (average mum and dad clients he always insists on fixed priced) because they give him alot of repeat business and he said that the clients he's built for have always come out better off using cost plus as apposed to fixed price....with fixed price contracts theres a significant few more thousands added in there as 'buffer' don't get this with cost plus contracts because the clients pay exactly what it costs the builder with a fixed commission.

with regards to the fixed priced contract for bank purposes....i believe this is 'the norm' almost with developers that use the cost plus method....there's a level of risk there for us but i think there are ways we can minimise those risks quite significantly....otherwise if all else fails and we decide its not the right way to go we could settle for a lower LVR for finance purposes and maybe do it as an 'owner/builder' type loan....just a bit more hurt money down from us but thats ok.

All of the cost plus contracts I have seen are cost plus a certain percentage rather than a flat fee as you have alluded to. They are usually used on commercial projects, and even then, mostly on projects that have not got sufficient documentation in place before construction commences for a fixed price contract, for example; lots of PC sums for items such as finishes, fitouts, demolition (possible contamination etc)
IMHO, they benefit the builder more than they benefit the client as the builder is not held financially liable for any mistakes or ommissions they make.

If you are serious about going down the cost plus path, I would recommend to cover your ar$e and get a quantity surveyor to draw up a bill of quantities so you know where you stand, and are able to track your expenses.

Now unless I'm of the mark I beleive Cost plus Contracts are iilegal unless they meet certain criteria set by law.

I would be stepping back and checking. Contact a building governing body such as Master Builders or HIA in your state to check this out.

my understanding of a cost plus contract is the $16,500/house fee i'm paying him is his fee for running around organising trades and making those necessary phone calls....he doesn't charge an hourly rate on top of that, thats all incorporated in his $16,500.

If that's the case you are getting a bargain. But still do your DD. ;)

All the best to you and the family. Love to hear the outcome of the project :)
Those urging caution are correct. I'd go further stating you should take your plans to a full service contractor and get bids. If you are not able to provide that level of detail and get such a bid, you are not ready to build under any circumstance. Without a reference, you are flying blind and inviting overage costs.

Consider: at the height of the realty boom here in the U.S., general contractors averaged 8-10% profit per job. In your instance, the average cost of the three homes would need to be approx. $165K to even out, right? No, because the general contractor would be responsible for *everything* associated the project, including cost control, to meet the budget contracted. I assure you "his cost" to build YOUR HOME(S) is more than his ACTUAL cost, simply a matter of transferring paper under the table. He will be earning his normal rate with measurably less skin in the game.

No way I'd do this.