Building a Quality Custom Home

Contracts without a fixed price, part 1
Cost Plus, with or without GMP, also known as Open Book

Cost Plus with No Gross Max Price (GMP)

Cost Plus with No Gross Max Price (GMP), commonly called "Cost Plus," is a contract method with no fixed price. Essentially, the builder is saying: "I'll build your house, give you every option you want, and you (the owner) agree to pay for the material and labor cost PLUS a fee. The fee embodies the contractor's profit and overhead. The contract should specify which project costs will be charged and what will not. For instance, if your house is wood-framed, you would expect to pay for the labor and framing material to build the walls. These are direct costs and are easy to understand. But you may not expect to see and pay for indirect costs such as the builder's supervision to manage the framer and coordinate with other trades.

Contracts without a fixed price, part 2

Shared Savings

Shared savings is something to consider when approaching an open book agreement. Most contractors will understand their fiduciary responsibility to the owner and will act responsibly with spending the owner's money. But to ensure the process is adequately incentivized, the owner and contractor sometimes agree to share the savings on the project. Essentially, they agree on an initial budget, and if the project ends up being less than the budget, the savings are shared.

Part 1 about Fixed Price Contracts

Last time, we reviewed some important elements of any construction contract. Don’t forget that a detailed Scope of Work is essential to setting the proper expectations with your contractor.

Now let’s go through the types of contracts that you may use. Contracts can be lumped into several different types: 1- Lump Sum, (or Fixed Price), 2- Cost Plus (with or without a Gross Max Price, or GMP), and then there are hybrids such as a design-build or design-assist that starts as a Cost Plus and then converts to a Fixed Price. So let’s start with the one most used and easiest to understand:

Part 2 of Fixed Price Contracts, Allowances

As a customer, you may want to know how much something costs the builder. With a Fixed Price contract, generally, the Owner doesn’t have the contractual right to this information, and thus, the contractor will generally not share that info. Sometimes, owners want to know the cost of items, so after a quick “Google search”, they think they have the answer. This is not necessarily the case.