Billing Transparency
I feel that one of the most important items when building a new home or remodeling is how do things get paid through the construction process. Lump Sum or Cost Plus are the two most common methods that are used by General Contractors. General Contractors can bid on a house or remodel project a couple of different ways, and you should understand what method is best for you.
LUMP SUM - the contractor will give you one number for the cost to do the entire project. You aren’t necessarily going to see a line-item breakdown of what everything cost.
PROS: The nice thing about this method is that you know exactly what you’re going to pay at the end of the project. That is if you don’t change anything throughout the building process. Also, if a contractor messes up the math in your favor, they will typically have to absorb that extra cost instead of passing the cost onto you.
CONS: The downside is that it creates unease for some people to not understand where their money is going. If you don’t have a trusting relationship with your GC, it could lead to resentment. The other downside is selections will be very limited.
COST PLUS- the contractor lays out a transparent bid for you to review. Line items such as foundation, framing, plumbing; everything that it takes to put the project together. At the bottom there will be a line item for GC profit-meaning their cost to manage the project for you. This can range anywhere from 18%-40% (or more).
PROS: You have a full look at exactly where the costs are allocated in the project, giving you some peace of mind that you know what’s going on behind the scenes. You will have more freedom when selecting items and materials for the home.
CONS: This method can be more work for you and the GC. Owners may try to get involved and micromanage the process. This can add a lot of hours to the process and can result in a Change Order for the builder’s time. Also, could lead to resentment.
Another key item when building or remodeling is to always use a Title Company. The invoices will always flow through the GC and then be sent to the Title Company for them to issue checks for labor and materials. They will also collect W-9’s and lien waivers. This fee is under $1,000 but is well worth it. It is a piece of mind knowing everyone was paid and all the materials were paid for.
