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EIGHT TIPS TO AVOID TROUBLE IN COST-PLUS CONTRACTS

For most builders cost-plus contracts are a tricky area � they offer a potential minefield for the uninitiated. Here are suffestions to avoid trouble:

1. Do not use a cost-plus contract unless you have flawless record keeping. This contract gives the customer the right to see every sheet of paper associated with the job. If your reports to the client are not presented clearly and comprehensively, it is possible that your customer will assume that everything else � including construction � is flawed.

2. While the construction project is work in progress (via change orders), the deal is not. Make sure the contract details all the mechanics of the deal. For example, have a regular billing schedule (weekly, biweekly, or monthly) a method for determining how much to bill, a set markup, and a clear list (with definitions as necessary) for items that will be marked up.

3. Cost-plus contracts are an open book. Most clients don�t like to see a high markup. However, if your markup is 15% your effective gross margin is only 13%. The way to maintain your real gross margins is to get the costs in before markup. Typical overhead items such as administration can be turned into direct costs (ie marked up) if you have a system and put it in the contract. For example, change orders may include one hour of administrative time, charged at $23/hr. If a customer questions what things are left in overhead as part of the markup percentage, you may list all the things that are not direct cost (general insurance, office rent, office equipment, sales and marketing expenses, vehicle expense, telephones, etc.)

4      A builder without cost-plus contract experience may feel that it          is easier than a fixed-price contact when in fact every step of           the way is more difficult. A cost-plus contract requires that the
         up-front negotiation covers how all aspects of the job will
         be counted, tracked, and paid for. The builder must follow up each change the customer makes with new estimating, change orders,.

        purchases, special orders, billing, and payments. Customers not only have
        a right under cost-plus contracts to carefully watch every step of the
        project but it is also their responsibility. The customer effectively takes on
         the hybrid role of designer, project superintendent, and purchasing agent.

5. There isn�t one �right� way � just good salesmanship.
       Terms in a cost plus contract are negotiated by both parties
       Decide in advance what you want. If the customer won't
       respect your needs, then walk away. It is your responsibility to
       Protect your business.

6. A cost plus contract is a negotiation for selling services.
There isn't one "right" way to do it - just good salesmanship!

7.   Do not use a cost-plus contract because the client thinks
       he/she will save money by controlling the process. If the
       client is motivated by getting the most for the least, either get the
       client to make all the decisions up front and do a set-price
       contract or, possibly better, run away fast. Every builder who
       went down the path to save money will tell you that it ended
       badly and the opportunity cost (ie not being able to build good
       plus contracted homes takes from 2 to 4 times longer to build
       because of inevitable delays caused by changes.

8.   The most successful cost plus contracts are signed for one
       reason - the client has deep pockets and is willing to pay for
       what he or she wants, regardless of the time or money.
by Allan Freedman, Business Management & Information Technology Committee.

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