To fix or not to fix (a contract amount)

In case you can’t tell, the dapper gentleman in the clip art is reviewing a contract to remodel his kitchen.  He’s never remodeled before, but is excited about the potential.  At the same time though, he’s nervous; he is making a large investment that will impact how he lives in his home, and potentially how and when he can sell it.  However, he doesn't know enough about the remodeling process to know what to ask. Luckily for you, you’ll never be like that guy because you have me.  ​

Fixed Price Contracts
Almost every contract I sign with a client is fixed price.  I prefer it for several reasons:

1. I normally work on full remodeling projects, where we are taking the affected space down to the studs and starting from scratch.  Given that I don’t have x-ray vision (hugely disappointing, btw), there will be unknowns as to what is behind your walls prior to starting construction.  Based on what I can see in the existing finished space, I make assumptions as to what I can’t see.  Anticipating potential problems at the beginning, and including them in the contract, reduces the number of surprises later on.
   ​
2. There are many material selections that need to be made.  By making the selections prior to signing a contract, we know what all of the costs are, and they can be included.  When the selections aren’t made ahead of time, an ‘allowance’ is provided to the client (smaller contractors tend to write all/most of their contracts this way); something like Faucet Allowance: $100.  The problem with allowances is that most homeowners don’t know how much materials cost, and when there is a contract full of allowances, the expectation of cost could be drastically different from reality. 
   
   The narrative goes something like this:
   
             Homeowner: “I’m so excited to go to the plumbing showroom today to pick out my    
             new faucet.  I can’t wait to see all of the great options.”
   
              [ WALKS INTO SHOWROOM ]
   
             Showroom Rep: “Hi there, welcome to our
                                          showroom.”
             Homeowner: “Hi there plumbing showroom
                                     representative.  My builder sent
                                     me here with $100 to buy a faucet.
             Showroom Rep: “Ok great.  Here is everything we
                                          have for $100.”
             Homeowner: “Wait, there are 3 options, and they
                                     all look like the old faucet I already have.”
             Showroom Rep: “Ok, then let me show you some of
   ​                                       our newer options.”
             Homeowner: “Wow, this one is beautiful.  I’ll take it!”
             Showroom Rep: “Great, that will be $600, please.”
   
   ​Sadly, the story above happens all the time.  And you can imagine what happens when you are making selections for an entire project worth of allowances.  The cost delta could be huge.  
   
   Allowances make the initial contract price seem low, but unless you really understand what you can buy for the allowance amounts, they could end up costing you much more in the long run.  
   
   ​With that said, using an allowance here or there within the context of a fixed price contract is a useful tool to keep the design process moving, as long as the amount used for the allowance is realistic for the materials you’re talking about using.
   
   
3. You're making a large investment.  I am committing my time and reputation to help you through processing that investment.  It is extremely important that all of our expectations are aligned.  Before we ever swing a hammer, I want to know exactly what we’re building, and I want you to know exactly what it will look like, and exactly what it will cost.  It is nearly impossible to facilitate that without a fixed price contract.  

Time and Materials Contracts
A Time and Material (T&M) contract is one where you agree to pay a certain hourly labor rate (time), and a markup on the materials supplied (materials).  

With a T&M contract, the final price is unknown when construction starts.  That might sound a little scary.  It can be, depending on the type of project you’re thinking about doing.  If you need some shutters replaced, or a loose deck board screwed down, or new closet doors, a T&M contract would be a great way to go.  They are easy to write, read, and sign, and the costs for those projects are easy to anticipate, so there shouldn't be any surprises during construction.  

If, like the dapper gentleman above, you’re looking to remodel your kitchen, a T&M contract would be a very risky proposition.  There are just too many variables involved.  If the contractor you’re talking to says, “yeah, looks pretty easy, should be around 4 weeks,” but it actually takes 8 weeks because of unanticipated issues, your cost just doubled, and your expectations are destroyed, leaving the relationship soured.  Nobody likes a sour relationship - unless you’re a Sour Patch Kid - but you’re not, so let’s move on.

Here’s how I typically use a T&M contract.  I like to call it the “oh by the way list.”  Let’s say I worked through the kitchen design process with the Dapper Gentleman, we’ve signed a fixed price contract, and construction has started.  He sees how great the craftsmen are, and realizes that maybe he can get a little help taking care of the things around the house that haven’t gotten done.  I’ll get a call from the D.G. one day and he’ll say, “hey TJ, everything is going great with the kitchen.  I’m really happy with how it’s turning out.  Oh by the way, while your guys are here, would you mind taking a look at a few things I’ve been meaning to get done?”  This is the perfect situation for a T&M contract.  We’re already familiar with the house and the project is easily anticipatable (is that a word?  If not, it should be.  For the sake of this post, it is).  It’s just a matter of ordering the extra materials and spending the extra time.

I hope you can see that both fixed price and T&M contracts can be valuable tools, if you know when to use them.  If you aren’t sure which would be better for your project, or want to learn how to get a new kitchen like the D.G., give me a shout.

Bye for now,
TJ