[Toby Cornell] Cost Plus, Monthly Fee, or Hard Numbered Contract – Which Is Best, And Why?

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Pricing your projects correctly is something every contractor deals with. So this episode is one you definitely don’t want to miss.

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In this show you will learn the pros and cons of each job pricing method:

* Cost Plus Method

* Monthly Fee Method

* Hard Numbered Contract Method

Also, you will hear which method Toby prefers, and why.

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Don’t miss this episode! #Protractors – Making A Difference!

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>>>>>Read The FULL Blog Post Here>>>>>

Martin: Thank you so much for taking time out of your day to hop on here. Toby, real quick tell us where you’re located and what it is that you do specifically.

Toby: We’re in Southern California, a city called Chino. We do luxury homes from the ground up pretty much in most of the cities in Southern California, from Orange County, San Bernardino, Los Angeles, parts of Los Angeles County. The average size we do is about 8,000 square feet. Over the last five years.

Martin: Nice. Toby, how long have you been doing this?

Toby: Twenty years this year. In October it will be 20 years since I’ve owned the business but I’ve been in it since I was a kid. I’m a third generation builder. My grandpa was in construction, my dad was in construction, and he actually started the company before I took it over 20 years ago.

Martin: Wow. All right, the question we have before us today is one that we all deal with and it’s how to price your work. The question goes like this. Do you do cost plus, monthly fee or just a hard numbered contract based on scope of work? What do you prefer and why?

Toby: Yeah. I’ve actually done all three. The one that we use the most and the one that I prefer right now for the jobs that we’re doing is a fixed price contract and there’s multiple reasons why. I can go over some pros and maybe some negatives too but it’s going to be different for every contractor. This isn’t going to be the final thing for every contractor. Some smaller contractors who do remodels or even custom homes may be fine with construction management or cost plus but this is just kind of my point of view.

Martin: Awesome. Let’s hear it.

Toby: Okay, so we’ll start with the negatives. Fixed price negatives, if you don’t know how to bid a job or you don’t bid it properly you can lose a lot of money. If you’re kind of new into construction or if you’ve never done a very large detailed home this may be hard for you to do a fixed price contract because you may just not know how to do it and if you do do it there’s a potential to lose a lot of money. Then, the next one would be unless you have a stipulation in the contract for cost and materials that go up you can also lose money on that if the price increases from the time that you bid the job to the time that you’re actually needing those materials. Let’s say I have bid lumber out. Well, you know lumber’s a commodity so it goes up and down all the time. It takes six more months for the homeowner to get their plans through plan check, which in Southern California that’s not uncommon, and the price of lumbar skyrockets. Who’s going to be on the hook for that?
If you don’t have a stipulation in your contract that says if materials go up you can charge for those materials, which a new guy probably wouldn’t have that in his contract, you could lose a lot of money right there.

Martin: Good point.

Toby: Another one that would be a negative is if your subcontractors don’t bid it properly or miss something on the plans or the plans aren’t totally clear and you didn’t catch it and they didn’t catch it, the burden may fall on you for the mistake. Most subcontractors aren’t going to eat it and you’re not going to want to go back to the homeowner and say, “Hey, this was kind of unclear. I’m going to have to charge you extra for this.” Nobody wants to do that so you really have to know the plans, research the bids. Make sure that what has been bid is on the plans and is accurate because that could be another thing that comes back and bites you on a fixed price.

Martin: Good point, yeah. What are the pros?

Toby: Some of the pros are you have total control of the job. You’re in charge of who gets hired, where you get the materials, and everything purchased, for the most part. I like that because I’ve done the other two, construction management and cost plus. The homeowners tend to get more involved with those type of contracts in the sense that they figure they can go get bids on their own and try and bring them in. Then, you may be working with subs and/or suppliers that you don’t like or that maybe just aren’t that good but because a homeowner got a good price from them they want to use them.
A fixed price it’s in my contract, the homeowner can’t hire any of their own subs and then I control the quality and the type of work that goes in.

Martin: What if you wrote up a contract cost plus and still maintained total control of the project?

Toby: You could still do that but with that you would probably need to get three or four bids to show the homeowner. The other problem with that is your guy may not be the cheapest, the guy that you want to use out of those three or four bids. Then, the homeowner is going to then say, “Well, I want to use this guy.” As long as the homeowner is okay with you having total hiring control in a cost plus that would still work but most of the time it doesn’t just because there’s so many variables like that.

Martin: Yeah. What are some advantages of going with cost plus?

Toby: Cost plus. All right, so the cost plus pros are you’re guaranteed the percentage that you ask for so there’s really not a chance to lose money. If the costs go up during the duration of the job such as from subcontractors or materials you are not really on the hook for that either, it would be the homeowner. Ease of calculating and adding up your percentage is fairly easy because if you do it on a monthly basis you would just add up all the bills for that month. Then you add your percentage on and then the homeowner would have to write your check at the end of that.

From a consumer point of view, cost plus pros would be they may feel like they saved because they may not have to pay the contractor contingency. You hear that a lot from customers. When they do talk about it is, “I heard you guys have a contingency for a fixed price.” That wouldn’t be there if it was a cost plus contract. They like that but in the end they’re still going to pay because I use my contingency line item on every job. It’s for damage, it’s for when materials do happen to go up a little bit or if a subcontractor did miss something I’ve got that little extra pad. In reality the homeowner still will pay that, there’s just no line item or it’s not coming out of the contractor’s portion of it. They’ll just have to pay the contractor or the supplier, whatever ended up costing more.

Then the customer may also feel that the contractor is not cutting corners because they’re hiring contractors that aren’t the cheapest, or if I gave a fixed price and I had 20 grand in a line item and I found someone to do it for 10 grand the work may not be up to snub but I made 10 grand. Homeowners, if they hire a good contractor, those things won’t happen but there are bad contractors out there that will pull those games.

Martin: Yeah. Toby, I’m sure a lot of your, if not all of your projects, span many, many months, if not years. How do you work up your pricing structure for those that go on for months?

Toby: Well, so on my fixed price contracts I have a set number on the line item for our profit and overhead and insurance. I put in my contract this job should take 12 months or 18 months or sometimes even 24 months depending on the complexity of it. Then monthly when … Usually it’s a bank loan so monthly when we bill I just divide my total times the amount of months that I thought it should take and then I take that much out every month so it’s a pretty even amount every month that we get. Of course there’s times that it does go over because of change orders or the weather or whatever the case may be. Then towards the end you’ve got to kind of have to reevaluate and say, “Okay, how many months are left and how much money is left in my line item?” You kind of readjust as you go.

Martin: All right, Toby, unfortunately we’re out of time. Could you just give us some parting words on this particular subject right here?

Toby: Yes, so construction management I wouldn’t really suggest that to anybody unless you’re just kind of starting out. Fixed price is great and that’s the way that I do it. It’s good for the customer. They have a good, hard number budget that they can work with, the contractor knows what the budget is so I like that. Cost plus is also good but you just have to put somewhere in your contract that you can maintain control of who works on the job. If you do that then cost plus is also a great option.

Martin: Awesome. All right, so there you have it. Cost plus, construction management or fixed price. Toby, thanks so much for coming on. If somebody wants to follow along with you and what you have going, where do you want to send them?

Toby: Well, I have a nice new website so you can go to Cornellcustomhomes.com or I’m also on Facebook or Instagram.