Cost Plus vs Fixed Price Contracts, Part Two

(In the last post, we discussed the differences in Cost Plus and Fixed Price Contracts, including three things to consider when choosing between the two.  Now we will look at the last four points.)

Things To Consider:

1. It is obvious to see that the lump sum contract, if calculated properly, should contain contingencies for overages.  This would imply that a cost plus contract would save the client money.  Well, maybe… in the case of a very good, savvy builder who is also a good business manager.  To be accurate, the builder almost has to be able to predict the future.  Are material costs and labor costs going up within the next 8-10 months?  Then, those costs have to be adjusted for inflation.  What if the project stalls and ends up taking longer (for whatever reason)?  The longer the project is prolonged, the more it costs due to rising costs of materials and certain fixed monthly costs such as cleanup, infrastructure, etc.  So, if the project is fixed cost, the builder must pay these overages.  If it is cost plus, then the client pays the overages.  Why would a project stall, anyway, though?  Lots of things: really, really bad weather, the client’s daughter is getting married leaving little time to make selections, the clients are traveling in Europe, etc.  All of these have happened. Hey, wait!  You just said that the cost-plus contract situation isn’t compelled to finish quickly because the cost overruns become the client’s costs rather than the builder’s.  Hmmm….guess I did say that.
2. There is an obvious incentive in a fixed price situation for the builder to not only make his estimates for each line item but to beat them.  Is that a good thing?  Absolutely!  A more efficient job is better for the environment, better for morale, and better for the client.
3. Having said that, then there is a not-so-obvious incentive in the cost plus situation for the builder not to focus as much on controlling costs.  I hate to say it, but haven’t we just given the builder an incentive to let costs rise, since we are paying him a % of the costs?  Even without that, the most conscientious builder in the world will not be as focused on cost control and schedule because there are just a million little details to manage, and it is really hard to do this well.
4. Which of these two contract methods results in happier clients?  We think it’s the fixed price (lump sum) contract.  Trust is fostered in a fixed price situation because no one is worried about cost overruns (except the builder, but that’s his problem).  Our clients tend to enjoy the building process much more in this situation.   In addition, we enjoy it more.  The challenge of beating our own numbers and being able to delight our customers with an on-time, on-budget process is what gets us all up and out of bed every morning!  So many times, a client pursuing the cost plus situation is disappointed, even if they did save a little, with the feeling that they had to “constantly look over the contractor’s shoulder” to stay on budget.  Well, that’s understandable since the client was carrying the risk of cost overruns during the entire project.

So, all this being said, which one do we prefer?  Well, if you were to ask us what’s best for us, it’s cost-plus, especially during a period of price escalation, like we are seeing with rising gas prices now.  There have been many times that we fell WAY short of what we hoped to profit on a project because this caught us unaware. However, we prefer fixed price, primarily because it makes for a happier client in the end.  We don’t want to ask our clients to carry that burden of risk because it is our absolute GOAL for them to enjoy every day out there on the jobsite watching their home being built.  We want it to be care-free and fun!  We still do cost-plus, though, when asked.  Ultimately, the client is always right!

In the end, find a contractor you really, really trust…but “TRUST with VERIFICATION” (see my article on important research you should do on any builder you are considering in “How to Choose a Custom Builder“).  If you decide that cost plus is for you, then just understand that you are ultimately responsible for all cost overruns and make sure you have plenty of extra money to cover it.  There are all too many stories in the marketplace about cost plus jobs that never finished because they ran out of money….  Really, though, the trust issue is far more important than which style of contract you select.  A good, honest contractor will do a great job for you, and you will get much more value and benefit out of working alongside him or her than if you don’t trust them.

And this concludes my assessment and book (sorry about that) regarding the subject of Cost Plus contracts versus Fixed Price contracts.

Cost Plus vs Fixed Price Contracts: Points To Ponder

So, you have a little slice of your own piece of land in “Somewhere, USA”, on which you plan to build your dream home. You interview a couple of Builders only to leave confused about this subject: What type of contract do I want to use? Do I want to use a cost plus contract or a fixed price (aka, lump sum contract)?

Field Report from Adrian

Notice the finished window on the left and the instructions on the right

Recently Adrian, a Construction Manager at Jenkins Custom Homes, was challenged with the installation of windows that were unlike any we here at Jenkins have ever used. In an effort to follow the proper installation, Adrian assembled representatives from Eagle Windows, Tyvek, the framing crew, and ProBuild to discuss the manufacturer’s recommended method for the windows. Then they went through the entire process with one window and everybody watching. They used a combination of DuPont products such as Tyvek House Wrap, Flashings Systems, Weatherized Sealants, and DuPont Flex Wrap corners.

Adrian has written the following regarding this window installation:

“The windows (and doors) of a house are not only one of most important aesthetic elements they are also one of the most important areas to prevent the elements from getting in. Almost anyone can install a window and fill the opening. It takes thoughtful planning and a process to install them so that they protect the building envelope for years to come. We take the time to think through the process rather than just following instructions to make sure that the method used is correct for the application. This project highlights the need for such thought. This project requires the windows to be recessed into the exterior wall. This creates a more complicated drainage plane and requires the installer to be aware of the additional measures needed to properly seal the window and allow any moisture/water to drain away from the structure properly. It is for that reason we created the following process.”

As they discussed it, they created a legend on the wall so everyone could follow the directions as they installed the rest of this home’s windows:

1. Install sill with straight flashing (Dupont Flashings System)
2. Install bottom left and right corner flexwrap (Premade Dupont Flexwrap Corner)
3. Install sill pan (Dupont Flexwrap, up side at least 3” verticle)
4. Apply Dupont sealant to inside of nail flangs – not to rough opening
5. Cut Tyvek at top of window to lap over top nail flange
6. Set window in rough opening – confirm window is level!
7. Install fasteners (nails or screws) in nail flange (do not deform nail flange)
8. Install side flashing (Dupont Flashings Systems)
9. Install top left and right corner flexwrap (Premade Dupont Flexwrap Corners)
10. Tape Tyvek cuts in Tyvek at top of window

Besides writing down the step-by-step instructions for the process to be repeated on all the other windows in the home, they sketched a drawing of how it should look. All of this was in keeping with the Jenkins commitment to quality, to go beyond “good enough” and achieve excellence even in the details. This is what comes from working with a company who understands the “science” of building a home. Our thanks to Adrian for sharing his pictures and report of the event!

Basic Pest Control Tips For Your Home

Here in the Austin area – just like any other area of the country – we deal with a variety of pests that try to invade our homes. However the two we are most familiar with, thanks to their destructive natures and sheer number of them in our area, are the scorpion and the winged carpenter ant.

The striped bark scorpion is the species of scorpion most often seen in Central Texas. While it is not usually deadly, like any member of the arachnid family (which includes ticks, mites, and spiders as well as scorpions), its sting is painful and can cause an allergic reaction in some people. It can survive without feeding for six months, and usually enters structures seeking water and shelter. Our local variety of scorpion is distinctly associated with dead vegetation, fallen logs, and human dwellings. It is common for this scorpion to climb trees and walls, and they often are found in the attics of homes. During periods of hot weather, scorpions may move into living areas to escape the high temperatures in attics.

The winged carpenter ant, while commonly mistaken for a termite, is second only to the termite in the amount of damage it can impose on a home. Adding to the confusion is that it is not uncommon for both the winged carpenter ant and the termite to swarm at about the same time. However, it is vital that they be identified accurately, because control measures differ greatly for the two insect groups. Carpenter ants are social insects that live in colonies, primarily in wood. They hollow out wood to build their nests, making their galleries and chambers velvety-smooth as if a carpenter had sanded the surfaces. Their tunneling in wood and foraging for food and water lead to their “pest” status in or around homes.

Carpenter Ant vs. Termite

The first line of defense against any pest is to control the environment, making it as uninviting as possible. In the case of these two pests, many of the suggestions are the same.

• Remove all trash, logs, boards, stones, bricks and other objects from around any buildings on your property. Because the scorpion is nocturnal, during the day it hides under stones, in piles of rocks, in cracks in masonry, in wood piles and under the bark of trees.

• Keep grass closely mowed near structures. Prune bushes and overhanging tree branches away from the structure. Tree branches can give scorpions – and other pests – a path to the roof.
• Store garbage containers in a frame that keeps them above ground level.
• Never bring firewood inside the house unless it is placed directly on the fire.
• Plug weep holes in stone or brick veneer structures with steel wool, copper mesh, pieces of nylon scouring pad, or small squares of screen wire. (Steel wool will rust when wet, so it should be used only on dark-colored facades.)
• Keep window screens in good repair. Make sure they fit tightly in the window frame.

Beyond the environmental control, there are also insecticides that are effective for controlling many types of pests, including carpenter ants and scorpions. Carbaryl (Sevin ®), chlorpyrifos (Dursban ®), diazinon, propoxur (Baygon ®), or any of the synthetic pyrethroids (permethrin, cypermethrin, cyfluthrin, etc.), lambda-cyhalothrin, deltamethrin, propoxur, or bifenthrin. Look for products containing these active ingredients, and them around the foundation of the house and up to 1 foot above ground level on the exterior walls. Also apply pesticides around doors, window eaves, and other potential points of entry. Indoor treatments should be directed at potential points of entry, corners, cracks, and crevices where scorpions hide. Follow directions on the package for dosage, mixing, and application methods, or call a pest control service to do the work for you.

Our thanks to the Texas A&M AgriLife Extension Service for providing much of this information!

Build A Home Without Getting A Divorce – 5 Questions You Should Ask Yourself Before Taking The Dive

First published on 4/24/10, this post remains one of our most popular. Enjoy!

According to the MarriageBuilders website, a healthy marriage is built on the willingness of each spouse to meet the others’ emotional needs, to do “what it takes to make each other happy.” The reason marriages fail is that they “succumb to…competing interests. Instead of meeting each other’s emotional needs, they meet the needs of little Sally, or the production manager. Or they decide to buy a new home or car which forces them to work more hours and spend less quality time with each other” (source: MarriageBuilders.com). So, before you sign on the dotted line, ask yourself these questions:

What can we afford?

The number one cause of divorce among married couples is financial concerns, and the biggest investment most couples will ever make is a house. So it stands to reason that if you are not in agreement about what you can afford before you start building, the problems will only escalate after you have moved in. Dream house or not, the mortgage payment will come due every month and if that causes additional stress in your marriage, it could eventually lead to irreparable damage. The best way to avoid the scenario is to be clear from the beginning about how much money you are willing to spend and what you can afford. Then the rest will fall into place.

What elements of the home matter most to each of us?

Answer questions such as:

• Do you love to entertain?
• Are you both outdoorsy?
• Do you have pets that are your “other children”?
• Do you have children or are you planning to start a family? How many children would you eventually like to have?
• Will you need to accommodate an elderly parent or are you empty-nesters with children who will be coming back to visit?

Once you have a working list – and it might be different for each of you – try to order the list according to priority for each of you. For instance, if having a guest bedroom and bathroom downstairs so that you can accommodate your elderly mother is near the top of your list but your husband really wants room for a workshop in the garage, then both of these must be worked into the design of the home. In the end, however, it is the willingness on both sides to give and take that makes you able to preserve your marriage and still end up with a home you can both enjoy.

How will we handle the additional responsibilities of building?

There’s no way around it. Building a home means adding a multitude of meetings to your calendar. How will you handle these? Is one of you more interested in the interior design and therefore more willing to take on meetings with the decorator and make the selections? Will you both try to be at all the meetings? What if something comes up? Does one of your jobs allow for more flexibility? These are some questions that will save you from additional stress should you work through them prior to beginning the process.

How will we handle inevitable disagreements? Who will arbitrate our difference of opinion?

Before breaking ground, you may think you and your spouse are like-minded on everything. But no matter how prepared you think you are, there are always going to be disagreements. When these occur, how will you handle it? Talking through this question may help settle the arguments before they occur. For instance, one way to handle this is to agree to let your builder or decorator be the tie breaker. Having quality professionals you can lean on can help take the pressure off of the two of you.

Another way to approach these differences of opinion is to consider resale value. “No matter how much you love the house that you are building, it’s unlikely that it will be the last home you will ever own. Knowing that, you should be mindful of its potential resale value….Ask yourself if the features you’re considering installing are likely going to appeal to others” (source: www.lendingtree.com).

Do we have what it takes to keep our marriage thriving despite the additional demands of building?

The bottom line is to maintain open communication and be willing to put the health of the marriage relationship above your individual desires. And if any of this worries you, take heart! Shan Jenkins of Jenkins Custom Homes says, “Given the right set of circumstances and the right people, [building a home] could actually bring the couple closer together especially once the tough choices are behind them. In all my years in home building, I have never had a couple divorce over the stress from building.”

Photo: Copyright Grady First

Belvedere Kitchen Event

On September 12, Shan and Bethany Jenkins – owners of Jenkins Custom Homes – hosted a kitchen event at the Belvedere Community on Hamilton Pool Road. The event was well-attended and the response, overwhelming! Several of the attendees requested a copy of the seminar notes so here is an overview of what was discussed.

Good Kitchen Design

There are many facets to good kitchen design. At Jenkins, we have a copyrighted “Lifestyle Analysis” process for designing your home that starts by asking questions about how you plan to live in the spaces of your home and ends with a home designed around your personal lifestyle. Here is a modification of that system of design, brought to the scale of just the kitchen.

What Type Of Cook Are You?

No matter who is doing the cooking in the family, they definitely have a cooking style. Is it typically either the “quick and easy cook” or the “serious chef”. If you find yourself constantly trying out new recipes from the Food Network, you are probably the “serious chef”. The “serious chef” needs more appliances, solid-surface counters, and plenty of workspace; whereas, the “quick and easy cook” needs a kitchen that is functional but also easy to clean.

“Kitchen Behind The Kitchen”

The “kitchen behind the kitchen” – or the “back kitchen” as it is also known – is a popular trend right now. The “back kitchen” can be used for food preparation and can contain the mixer and blender, a refrigerator, a microwave, and even an oven so that even the most “serious chef” – or even those who prefer to “grab it and go” – can make a mess without worrying about the company seeing it. For those who prefer to have events catered, this is a great location for the caterers to set up their service.

Entertaining

Entertaining is multifaceted. First, ask yourself “How often do I entertain”? If it’s twice a year for your relatives, then you really only need to consider the re-sale value of the home when designing your space and not focus too much on the entertaining aspect. If you entertain once a month or so, you may want to give it a little more thought. For instance, when you entertain, is your cooking part of the evening’s entertainment or does the cooking take place before everyone arrives? Also, do you typically entertain indoors or outdoors – or both? The answers to these questions will help determine the size and shape of the island, the proximity to the outdoor kitchen, as well as the amount of space needed between the sink, refrigerator, and primary work space. It also may dictate that you really need two sinks and possibly two dishwashers. Ask yourself “How many guests will I have at once and what ages will they be?”. Think about where you might put a bartender if you have a really large party.

Livability

Another important question to ask yourself is “How many cooks are typically in our kitchen at once?”. Will you need one workspace or two? More and more families are cooking together, and that means you need more space, both in terms of workspace and work flow within the kitchen. Other questions you need to consider are “How many people would you like to seat at the bar or island?” and “Do you plan to have a separate breakfast table?”. Each situation is different, and only you know yours.

Vision

When planning your kitchen, you need to establish a style that leads you toward a particular end product. Zig Ziglar has said, “If you aim at nothing, you’ll hit it every time.” So ask yourself “What one keyword describes your vision for this space?”. Is it “inviting” or is it “clean” or maybe “Tuscan” or “commercial”? What type of sink and plumbing fixtures fit into your vision? Do you imagine a copper sink with copper plumbing fixtures? Or is does your vision include an undermount sink with sleek clean lines and stainless steel fixtures? Only you know how you want the kitchen to look, and defining that vision will help you determine the materials you will use, the stain or paint colors, and any “wow factors” that you may want to add. It all depends on that vision.

Appliances

We always recommend Wolf and Sub-Zero appliances to our clients. They were recently chosen #1 by J.D. Power and Associates, plus we have found them to have the absolute best performance and look for the kitchens we design. However, choosing a cook top or range and refrigerator is just the beginning. Think through all the possibilities for kitchen appliances. For instance, the microwave – do you want a microwave drawer, or do you prefer the more traditional unit? Or consider the refrigerator – are you a Sam’s or Costco fanatic? Then, you may need the 48″ Sub-Zero. You can never have enough refrigerator space! Then there is the oven and cook top – do you want a double wall oven with a stand-alone cook top, or an all-in-one range unit? This decision is really just about your personal preference and not so much a performance issue, but it is a decision you must make nonetheless. Even something as minor as the ice maker deserves consideration. How much ice will you need for your parties? Is the ice maker in your Sub-Zero enough, or do you need more than that? Do you require wine refrigerator, and if so, is under-counter enough or will you need a full sized unit? Do you need one dishwasher or two? What about a warming drawer or pizza oven or perhaps a trash compactor? For even more options, see your local Kiva Kitchen & Bath representative.

Access And Flow

Do you want the kitchen to be the hub of your home? Do you want it to be open to the great room? Some people don’t want anyone walking in the front door to be able to see into the kitchen. Think about whether that is important to you. Others want the kitchen to be open to the great room and like people to feel invited to come into the kitchen right away. These are just a few of the things to consider in terms of access and flow.

Making It Yours

The bottom line is that when you design your kitchen, you will never regret the time and effort you spend making it yours. Your kitchen should reflect your family, your lifestyle and your vision. When it does, you will be living your dream.