In the latest episode of the Builders, Budgets, and Beers podcast, Ryan Hansen, partner at Sustainable 9, dives into the nuances of cost-plus versus fixed-price contracts in the realm of high-end custom homebuilding.
Sustainable 9, known for their custom, sustainable homes in Minneapolis, has adopted the cost-plus model as their standard approach since day one. But what drives this preference, and how do these contract models impact builders and clients alike?
In a fixed-price contract, the builder agrees to complete a project for a predetermined sum. This model offers clients cost certainty but places the risk of cost overruns squarely on the builder's shoulders. Unexpected increases in material costs or unforeseen site challenges can erode profit margins, making this model potentially precarious for builders, especially in volatile markets.
A cost-plus contract involves billing the client for actual project costs plus a set fee or percentage for the builder's overhead and profit. This approach provides flexibility to accommodate fluctuating material prices and design changes, fostering transparency between the builder and the client. Clients can see exactly where their money is going, and builders are less exposed to financial risk from unforeseen expenses.
Ryan Hansen articulates that the complexity and bespoke nature of high-end custom homes make cost-plus contracts more suitable. The unique challenges inherent in luxury builds–such as intricate designs, specialized materials, and client-driven modifications–necessitate a flexible pricing model. Cost-plus allows Sustainable 9 to adapt to these variables without compromising on quality or financial viability.
The construction industry has faced significant material price volatility, exacerbated by events like the COVID-19 pandemic and international trade tariffs. Builders operating under fixed-price contracts during these periods often had to absorb unexpected cost increases, leading to diminished profits or financial losses. This unpredictability has prompted many in the industry to reconsider their contract strategies, with a noticeable shift toward cost-plus agreements to mitigate such risks.
Cost-plus contracts can enhance trust and collaboration between builders and clients. By providing detailed breakdowns of expenditures, clients gain insight into the true costs of their custom home, leading to more informed decisions and fewer disputes. This transparency aligns with Sustainable 9's commitment to delivering exceptional, tailored experiences to their clientele.
While both contract models have their merits, Sustainable 9's adoption of the cost-plus approach reflects a strategic response to the demands of high-end custom homebuilding.
This model offers the flexibility and transparency necessary to navigate the complexities of luxury construction projects, ensuring that both builder and client can achieve their desired outcomes without undue financial strain.
For a more in-depth exploration of this topic, listen to the full podcast episode here.
