# Lump Sum or Cost Plus



## markstg (Nov 28, 2010)

I've just received the drawings from my architect for the new house my wife and I want to build. They are very detailed, and I have been talking with builders on getting cost proposals for building the house.

I've contacted 5 builders and 3 said they would submit proposals for the house on a cost plus basis and 2 said they would submit proposals on a lump sum basis for the house, with allowances for items we get to select (lighting fixtures, plumbing faucets, flooring and the like).

I'm trying to figure out which is the best way to go. All 5 contractors seem capable of building custom houses. 

Thanks for your input.


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## Darwin (Apr 7, 2009)

You will _always_ come out better with a lump sum arrangement. That is the way I would proceed.


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## griz (Nov 26, 2009)

markstg said:


> .... All 5 contractors seem capable of building custom houses....
> Thanks for your input.


I would not deal with anyone that _*seemed*_ capable.
You're in the trades you should know who is capable.




Darwin said:


> ...You will _always_ come out better with a lump sum arrangement....


No, you won't.


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## chris klee (Feb 5, 2008)

the answer is: it depends. 
when we do it its usually a design build situation. 
​


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## PlumbersSanJose (Apr 16, 2011)

Trust your gut. There has to be 1 in the group that feels good on either cost arrangement.


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## Bob Kovacs (May 4, 2005)

I'd say it really depends on the house itself- if it's truly a "custom" house, and there are items that can't be readily priced- even with the detailed plans- cost plus may be the better option. If, on the other hand, there's really nothing left to the imagination, there's no reason to go cost-plus, IMO.


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## Framer53 (Feb 23, 2008)

Sounds like the home builders on the cost plus are too lazy to work out a good bid.

On the other hand, they may be familiar with the architect you are using and know that it may appear to be detailed, they really aren't a good set of plans and they need the wiggle room to work it out.


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## Bearded Wonder (Jan 21, 2011)

As a builder, I like the cost plus. I feel it is the fairest to both parties. Not because I'm too lazy to bid, I actually quote the job precisely before I start and my fee is capped based on my quote. If costs go over, customer pays for the overage, but not my fee on the overage, so I have incentive to quote accurately. If actual costs are less, my fee is based on that amount. 
I explain it like this to customers. With a lump sum, if I estimate say drywall at $25,000.00 and I wind up getting it done for $20,000.00, that's 5k in my pocket. On a cost plus, that's money in their pocket. 
I realize there is some trust involved in cost plus, because I could arbitrarily push the cost up to collect a larger fee. I work hard to show them I am working in their best interest. If I can save them money without sacrificing quality, I will do it. And I will point it out to them. 
And really, both can work well. I would go with the builder you have the most confidence in, that has the best reputation etc.


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## markstg (Nov 28, 2010)

Thanks for the responses.

As much as I hear from the Cost Plus Builders that from the budgeted amount they pass on the savings to the owner, they also pass on the cost increases. It seems to me that there is just as much chance that their budgeted amount will go up as will go down. If they do a precise cost evaluation, why wouldn't they say they will due it for that number plus their fee. 

It seems to me by the Lump Sum method, the builder gets bids from all his subs, puts together the items that are fixed for the house plans, adds his fee, interest, overhead expenses, etc. Then just like I hold him to his fixed cost, he holds his subs to their fixed cost, and it is known going in what the cost are. 

Do banks give loans on Cost Plus estimate contracts. That also seems to be a problem. If the Builder overruns how do I get more money.


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## jhark123 (Aug 26, 2008)

^if you do a bank loan you need to have a cash contingency for cost plus. Actually, you need to have a cash contingency no matter what when building a home (deductables for insurance due to theft or damage).

The builder I learned from only does cost-plus and you would be hard pressed to build a home of the same quality for less.


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## izzy (Oct 6, 2009)

I like cost plus with not to exceeds. Lump sums has its advantages if you use lump sums pay special attention to the allowances. If you have the time get pricing your self on allowances and have the builders use those in there bid you will be picking them out anyways.


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## Inner10 (Mar 12, 2009)

> Sounds like the home builders on the cost plus are too lazy to work out a good bid.


Ding Ding Ding


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## markstg (Nov 28, 2010)

izzy said:


> I like cost plus with not to exceeds. Lump sums has its advantages if you use lump sums pay special attention to the allowances. If you have the time get pricing your self on allowances and have the builders use those in there bid you will be picking them out anyways.


I recognized early on during the drawing development stage to start selecting all the items needing selection, light fixtures, plumbing faucets tubs, kitchen cabinets, wood flooring, brick, and have cost for all of these for use in the allocations. Good advise.

I'll ask the builders if they do a not to exceed, and see where that goes, but it seems they like their business model.


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## Darwin (Apr 7, 2009)

markstg said:


> I recognized early on during the drawing development stage to start selecting all the items needing selection, light fixtures, plumbing faucets tubs, kitchen cabinets, wood flooring, brick, and have cost for all of these for use in the allocations. Good advise.
> 
> *I'll ask the builders if they do a not to exceed, and see where that goes, but it seems they like their business model.*


Of course they like that cost plus business model. It is advantagious (is that a word?) to them. They quite possibly will make more money, and cover their hineys, so to speak.


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## tbronson (Feb 22, 2010)

Cost plus not to exceed is the best overall in my opinion. That way they know what they are paying for, know it won't exceed a set amount, gets you your money as a part of the costs. But you need to be sure to keep an eye on things so you don't end up going past the exceed portion. But you can cover yourself with the Change Order process.


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## katoman (Apr 26, 2009)

Number one is to pick the builder you feel is most qualified. 

There is another option, which is cost plus a fixed fee. That is the job runs cost plus - you pay for what you get, and get what you pay for.

The builder charges a fixed fee to do the project. So if the costs run higher than expected it does not benefit him.

Typically the builder will present the the HO let's say three drywall estimates with his recommendation of who to use and why. But the HO picks the one to use.

It's a fair way of contracting for both parties.


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## markstg (Nov 28, 2010)

katoman said:


> Number one is to pick the builder you feel is most qualified.
> 
> There is another option, which is cost plus a fixed fee. That is the job runs cost plus - you pay for what you get, and get what you pay for.
> 
> ...



I don't think anyway that has been described in this thread is unfair. 

But evaluating 2 or 3 bids for all the major subs, geeez, that's why I'm hiring a builder.


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## Ckconst (Apr 24, 2011)

i think katoman was trying to give you your best case scenario in which you and the builder benefit the most from that type of arrangement. it is a little work on your part, but you are the only one who benefits from this. it is nearly impossible for a builder to give you a lump sump price with a truly custom home. there are too many variables, choices, preferences, etc. that is why a builder that does give a lump sum price will most likely be higher than your other bids, as he needs to cover himself to make sure he has all bases covered.( i have built most of the homes i have built on lump sum bids) the cost plus a fixed fee is your best option, in my opinion, but only if based on your most important decision in this whole process-your gut feeling and a little research as others have said. you need to trust and feel comfortable with the builder that you ultimately choose. you also need to speak directly with some recent past clients and ask them honestly what they liked or disliked about the builder. if he is worth anything at all, he will encourage you to do this. any builder can play the extra game, pad the bills, etc. so no matter what type of contract you decide to do, just make sure that you have someone you feel comfortable with. also, a good sense of humor and a good spirited attitude are always a plus!!!!


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## Ckconst (Apr 24, 2011)

also, one other thing. no matter what number you start with, it will not be the same as when you are finished. I have been a land developer/builder for the last 18 years and never once have the plans stayed the same from the drawn stage to the built stage. also, it is inevitable that you will substitute/upgrade/change many items as you go along, especially if you have a good relationship with your builder and he is hands on type. i try and build my clients homes as i would want mine built, and so during the process i will make numerous suggestions on changes, layouts, additions, subtractions, etc. that i would do if this was to be my home. and i do this whether it is a $200,000 home or a $2,000,000 home, and I have personally built both and everything in between.......cant stress enough how important your comfort level with the builder needs to be before starting work


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## markstg (Nov 28, 2010)

Ckconst said:


> also, one other thing. no matter what number you start with, it will not be the same as when you are finished. I have been a land developer/builder for the last 18 years and never once have the plans stayed the same from the drawn stage to the built stage. also, it is inevitable that you will substitute/upgrade/change many items as you go along, especially if you have a good relationship with your builder and he is hands on type. i try and build my clients homes as i would want mine built, and so during the process i will make numerous suggestions on changes, layouts, additions, subtractions, etc. that i would do if this was to be my home. and i do this whether it is a $200,000 home or a $2,000,000 home, and I have personally built both and everything in between.......cant stress enough how important your comfort level with the builder needs to be before starting work



In order that there was little left to the imagination I did these things
1. the architect created a 3 D model of the house with all the selected items. (Some paint colors where not to our likeing).
2. all the items which my wife and I need to select, have been selected, and cut sheets with model numbers, finishes, and quotations have been put in a binder and are apart of the drawing package.
3. I put together a specification for the AC, plumbing, and electrical, Audio system. 

With this I hope to have few changes, and let the market price my house.


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## Ckconst (Apr 24, 2011)

That is great to hear that you picked put everything on advance, but just speaking from experience....most things on paper that look good do not usually mean that most look good in the field. Also, there will be plenty of things(trust me on this one) that you will think about later or after seeing something you could not visualize in the drawings or even the 3-d

All the best to you in whatever you decide to. I hope your building experience is an exciting and pleasant one, as it should be


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## markstg (Nov 28, 2010)

Ckconst said:


> That is great to hear that you picked put everything on advance, but just speaking from experience....most things on paper that look good do not usually mean that most look good in the field. Also, there will be plenty of things(trust me on this one) that you will think about later or after seeing something you could not visualize in the drawings or even the 3-d
> 
> All the best to you in whatever you decide to. I hope your building experience is an exciting and pleasant one, as it should be


Best laid plans often go askew, Good Advice. Thnaks for all the input.


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