Cost Plus vs Fixed Price: Which Contract Protects Your Budget?

William Reid

All right, I'm back again here with the next episode. And I'm sitting here again with Chad Eslinger from the Northwest. He's a builder from the Northwest up in Lake Oswego, Oregon. And Chad and I spoke a couple episodes ago, and that was our first podcast episode together. And one of the topics that surfaced as a result of that episode, and if you want to learn more about Chad, please go back to that episode.

And you can learn about what he's up to because he's not just a builder, he's also developing some similar things like I am to help homeowners navigate this little scary process. But Chad and I had a really good conversation actually after the podcast episode and we got into a conversation about cost plus contracting method versus the design build method. There's two different primary ways that you as a homeowner can accept a contract from a builder, and for all you builders out there, you probably are already aware of these two different methods. But in the people that I've been interviewing and talking to, there sure is a lot of different understandings of both methods and the risks that come and go with them. And we just felt like this is a very valuable conversation that we're about to have about this for both the homeowners and all you guys and gals out there that are building a home.

So Chad, welcome back to the show and I think I just want to open it up and start talking about this thing that's getting talked about a lot right now on the internet, cost plus versus fixed price.

Chad

Okay. So yes, I agree a hundred percent. And it's something that I end up talking with all my clients about. So I think the earlier on clients can understand this the better. And for builders, the more nuanced they can explain this to their clients, the better. I'm constantly evolving how I present this whole concept to people. And I didn't realize until recently as well how big of a debate it was online between builders themselves as far as how they present what they do as either the only way or sometimes a hybrid way.

So we do both. So I'll start right off with that. I do both fixed price and cost plus based on the project, based on the complexity of that project, and also based on the buyer. There are some people who have strong preferences also. So before we go down that road, I'll typically have this conversation with them that we're gonna have today and explain the differences and what might be a pro or a con for them.

Because another way to look at this is fixed price is certainty. Cost plus is transparency, but it's not necessarily that straightforward because you can cross lines with either one of those. It really comes down to how do you prepare the numbers that represent the scope of work in the first place. So that can be done well. It could be done with big gray areas in it for either type. And you referenced design build in the beginning there as a part of fixed price, which is another big factor. How much information is going into these numbers that represent either a fixed price or a cost plus methodology?

tarted building homes back in: 1998

So when I first started, it wasn't even a thing. Normally they would disperse onto the ground, or if you were in a subdivision, they had a tie in out to the curb and gutter or something along those lines. Now we have to have fully developed, fully engineered, geotech approved storm systems. And when we priced the job originally, we cannot know what that's going to look like. We have an educated guess what it's going to look like, but we don't really know. So as the complexity of the building industry was increasing and the complexity of the homes that we were building increased, we realized that there needed to be more flexibility in what we were doing.

So in a fixed price model, that flexibility might be establishing a budget. And in a cost plus, that flexibility may also be establishing a budget. So what it really comes down to is what went into all of the numbers, whether it's a fixed price number, a budget within a fixed price, or a budget within a cost plus. It really comes down to that process. And in design build, you guys spend a lot of time going through that. As home builders, we receive projects that come in in a variety of ways. We have a really well thought out set of plans or a set of plans that was purchased from more of a plan factory type of place that's more generic and doesn't have plan specific details with as much depth. And so it's our job as the contractor to unearth that as a part of whatever process we go through. And that's the first layer of understanding this, that either way, it all comes down to how well thought out is the set of information you're putting into your contract and does the homeowner truly understand what that means and what that looks like.

William Reid

Okay, I have a question. Can you explain the way that your company implements the cost plus contracting method to help me understand how you do it? Because I hear a lot of different ways that builders do it. So can you walk us down that path?

Chad

Absolutely. That's a great question for several reasons. Whether you meant to ask this one or not, I'll start with this one. You can do a true cost plus, meaning every penny that's spent has a markup attached to it, or what I do is a cost plus fixed fee. And this is also very common with builders. So my fee is fixed based on the scope of the project. And that's part of what I was describing earlier. How well we define the scope of the project is both important for the numbers that the client gets, but for me because I price this way, it's very important that I be dialed in because I'm pricing my labor based on the scope of work also because I'm fixing that fee.

And one of the reasons that I do that is because if my client wants to pick a quartzite versus a quartz for their countertop and it's gonna cost them five grand more, I don't want them thinking about how much more they have to pay me to make that design change.

William Reid

Okay, let's stop there. So I have a question about that. And that's a really good, I'm glad you brought that up because that is one of the differences I've heard, right? So in cost plus contracting, you can take, a builder can take all of their costs, which is their labor, their materials, their subcontractors, their equipment, the porta potties, the whole nine yards, right? And the builder can have a preestablished margin, we'll call it, right? Overhead and profit, O&P or whatever you want to call it, that they assign to every single line item on the project.

So if the cabinetry is thirty thousand dollars from Fred's cabinet shop down the road, the builder has, you know, established a twenty percent or thirty percent overhead and profit percentage to that item. Let's say 30% for right now. So then the homeowner is actually paying $39,000 for those cabinets, which covers the operating costs and the profit that a company should be able to capture in order to stay alive. So that's one method, right?

And then what you're saying, I think what you're saying is that $30,000 number is shared with the client. In either case it's full transparency, right, in the cost plus. The $30,000 number is shared with the client. And then let's say we're building a million dollar project right now. Let's just keep it simple. And you said that in your case, the way you just described it, and correct me if I'm wrong, you say, okay, this project's going to be a million dollars. So therefore I'm going to assign a twenty percent, we'll just use that number for right now, a twenty percent project management fee, which covers all of your overhead and your profit for the project. Is that what you're saying?

Chad

Essentially, yeah. So the way I look at it is probably unique. So this is why I think this conversation is so important because every builder does do this differently and the more our clients can understand how we're doing it and why we're doing it that way, I think it's gonna make it a better process for them to understand when they're going through the pricing, especially if you're getting pricing from multiple different builders, understanding how to ask this question and for builders to understand how to answer it. Because I spend a lot of time

Chad (: 08:13

trying to figure that out too. So I'm saying it in a way that it's understood. But yeah, so essentially there's one other thing I want to add to this because I think this is — I'm really going to pull the hood back on this one a little bit. There are builders who will have their subcontractors and their vendors add a markup in before they even produce.

So I'll tell you the logic behind this. As a builder, we get discounts. If we buy in bigger volume from somebody, we may get a bigger discount. So we may be able to actually — let's say my discount is 15% on my appliances. I might be able to actually pass on 10% of that savings to my clients, keep five for myself, and then do my 20% markup on top of that and still sleep well because I know I'm still giving them a better price than they could go walk in off the street and buy it for. And my markup, like you said, is to be able to keep myself in business and all that stuff. But the problem is, and you don't realize this until you've been through enough transactions, is once your client sat in the showroom.

If they then decide, I want to do something slightly different and they want to make a tweak, and your showroom salesperson has to say, "Great, I'll send that pricing to Chad and then Chad will give it to you." My clients are smart enough to know what that means. That means that somebody's marking something up and then passing it on to them. And they started to get really frustrated when they couldn't get direct pricing from also, hard surfaces, picking tiles and hardwood flooring and all that stuff. Because I don't know how other people — I would love the feedback if people would comment on this video — but when we select materials for a new home, even if we picked everything in the home beforehand, by the time we're installing tile, a quarter of those tiles may not even be available anymore because we picked them so far in advance. So it's very challenging to have everything dialed into where there's no changes in material selections, which is why budgets and allowances are used frequently in both fixed price and cost plus. But I wanted to add that little bit of nuance on there because it's not just straight markup sometimes. It sometimes is getting marked up more than one time. And I believe that's a problem that starts to erode trust for a lot of people in either scenario.

William Reid (: 10:17

Yeah, I was just gonna say, I mean, that feels a little bit like double dipping there, from the builder's perspective, right? Where they're getting a profit off of the materials directly from the supplier and a profit on top of that, whether they're doing the fee, fix fee or they're doing the percentage on the line item, right? I mean that sounds a little sketchy to me. I wouldn't — I'm not sure I could do that.

Chad (: 10:42

No, and people shouldn't, but it's done. And I've seen a lot of builders discuss this online too, that they get accused of double dipping on anything they self-perform. So if you have an in-house employee and you pay them a certain amount, but then of course you have things like their insurance and whatever benefits you provide them that get tacked on. But in a true cost plus, there's been battles over this before, whereas if you're paying this employee twenty-five dollars an hour and then you're billing them out at eighty-five dollars an hour and then you're marking that up as well, that's also been accused of double dipping for the people who self-perform. So this is why I think it's so important to have the clarity and understanding for both homeowner and builder when they're going into this transaction. What are you pricing? I think the thing that makes me unique is I look at a project and say, for this home, if I need to be there for 12 months to build it and I have to have a project manager there and I have to have all these other expenses, that's what my fee is based on. It's not based on a percentage of what somebody spends. And so that is one of the biggest knocks I see on cost plus, is that people will say, "Well, you're motivated then to spend more money, more of the client's money, because you're marking that up." So whether you're there longer, which doesn't happen in a fixed price or a fixed fee because that's fixed. But I see a lot of people say that the cost plus contractor is motivated to be there longer and to make it cost more money because they make more money in both those scenarios, which can be true. That's the hard part about this conversation, is there's a lot of parts of it that can be true, and some people will try to pigeonhole the conversation to be black and white and it really is not. There's a lot of moving parts.

William Reid (: 12:15

Right.

Chad (: 12:16

And that's what I really wanted to talk about today is what are those moving parts and then how do they add up to make a fixed price or a cost plus what's truly best for a builder and a client together.

William Reid (: 12:26

Okay, but let's say you're building a five thousand — you're building a good size project, right? And you say, "Yeah, I think it's gonna take me a year to build this project." And as we know, projects change. Delays, whether they're weather delays or material arrival delays or customer decision delays, and all of a sudden you're there for a year and a half. Not uncommon, right? Especially in high-end custom stuff, right? And you said you were gonna charge them two hundred thousand dollars to manage the project as a fixed fee, but you're stretching it out to eighteen months, maybe even pushing further than that when you originally thought it was twelve months. What's happening there from your perspective as a builder? I mean, is that — that feels a little bit like you're gonna end up taking it in the shorts.

Chad (: 13:08

That's possible when those things happen. But this goes back into the whole concept of why I started the construction flow process that I run my clients through, is because I'm educating them on that before we even start. Because they don't want it to take longer. I don't want it to take longer. And I have reverse engineered all the things that have made that happen over the years. And that was what informed my whole process of what I call construction flow that I give to my clients that is informing them from the very beginning of all the ways that that can happen. And then we are on a weekly cadence, making sure that we're not allowing those things to happen. So part of it's my update to them, part of it's their information to me. So delayed decisions is a huge one. We try to eliminate those all up front. But the reality is when people see their home take place three-dimensionally, they see opportunities, they want to tweak things, and we want to do that for them. That's part of the custom experience. But if we don't educate them in advance on what that can do to the schedule and where the appropriate times and places are to do those things, like to ask for a change, to add something to the scope, then it's kind of on us as builders. And yes, I got burnt with that many times. And I even found that when it was cost plus, when you start trying to add your fee for those additional six months, like if it went from 12 months to 18 months like you said, that also causes a lot of erosion of trust and just hard feelings that you're now continuing to bill me for all these months because there's a lot of times where it didn't have anything to do with the client. It could be that materials were delayed. We had an ice storm. COVID was a big one. There are lots of ways that the schedule will be disrupted. A good builder knows how to build in little buffers for those things, like city inspections, they may not happen exactly when they're supposed to, or you may have to do it twice, or all these different things we have to build in. We have to know how to build a schedule, but we have to know how to take our clients through that process without allowing them to become their own bottlenecks because they don't want to be, and we don't want them to be. But if we don't have a process for that, it absolutely happens all the time. And I had to go do homework. So I can now say this and I would love other people's comments on this too. An average custom job costs a builder around $750 a day to be on. So if you went a month past schedule and you're now there 22 more working days at $750 a day, do the math, that's where all the money went. You know, as builders, I think —

a lot of times we're looking back and saying there should be more money in my account than there is based on all my workflow and what I had projected. And what I found is that most of it was erosion due to spending more time on the project than we should have. And that informs almost everything I do with my client process.

Yeah, cost plus. Boy, we're probably gonna fill a few episodes with this one because there's a lot going on up here right now. I want to get into the risk aspect of it too. But before we do that, well I guess we already are talking about the risk aspect from the builder's perspective. Let's continue that because, you know, cost plus contracting usually has — I shouldn't say usually, but is often a great candidate for mediocre plans, minuscule specifications, a lot of budgets and allowances. Same thing with design, the same thing with fixed price. We'll talk about that. And a lot of moving parts, a lot of change.

I won't — I'm not sure I'd call them change orders because it's really a cost plus, it's more fluid than a fixed price. But scope changes, clarifications, omissions, all this stuff can come at a cost plus project. And that's because usually, unless it's a client that really doesn't care how much the project's gonna cost — and they're out there. There's a lot of people like that. In fact, a lot of the very high-end builders only implement cost plus contracting because they know it's just impossible to pin everything down, and the client is okay with it because they don't really care how much it's gonna cost. I mean, within reason, I guess. But all of those moving parts and everything have got to really open up the builder for a lot of risk, especially if you're on a fixed fee agreement, which I guess is related to what we just talked about.

There's just so many — is there a remedy? Like you just mentioned, well, you could lose trust or diminish trust or undermine trust by saying, well, we got six more months, we're gonna have to charge another hundred thousand dollars now on top of our two hundred thousand dollars because I'm still gonna be here. I can't be somewhere else. I mean, you as a builder, and most of us are single operators with a team of subs and a handful of employees, right? Sometimes no employees, just a handful of subs. We can only be in one — we can't be in two places at once effectively anyway. So what happens when, and this happens a lot, you know, where the job just grows and grows and grows. Maybe it's just flat out, now I want to build an ADU over here, or now I wanna finish the basement, now I want to do all these things as the owner. And you were the builder in the back of your mind, are you just going, no, I'm going to lose my ass because I don't feel comfortable charging the client for more of my fixed fee management?

No, because what we're doing is we're real careful to define the scope in the beginning. So that fixed fee is based on a scope. So that's a great point of clarification. If someone added an ADU, now we've added scope and we would need to do a quote for that that represented the extra time that I would need to administer that. But that is why — so I'm taking one of the best protective measures for the client out of the fixed price and pulling it into cost plus, which is fixing my fee. But in order for that to be fair for me as the builder, I have to do a good job of defining what is the scope that I'm administering for that fee. So I used an example earlier of someone buys a more expensive material. But I appreciate your clarification because now what you're saying is when they add scope, yes, we have to go back and say, okay, this is going to be more time to administer.

But there's another thing you said in that too, which is very important that comes back to the schedule. One of the reasons we need to keep it on track is if I had another wave of starts coming in, new homes, and now this job is six months longer, now I'm still stuck on this job and I'm not able to serve my other clients in the way that I wanted to. So it is a challenge, yes, but it is a challenge we need to undertake as builders because we don't have infinite capacity to continue to carry on for our jobs twice as long as we thought and take on new work and stay profitable. Because a lot of times that additional work that was added, even if you change order at a nice percentage, I have found it very hard to recuperate dollar for dollar, hour for hour on what a lot of those things take for the time that goes into them.

So we do use change orders even in a cost plus scenario, because what that is is it's simply a tracking mechanism that says, here's where we were when we started our quote and contract, and here's where we went and why. Because even in cost plus, and I think this is another knock that is not discussed deep enough, there is still accountability. And if you don't think that there is, go work for enough people, you'll find out.

So there is accountability. And so if we don't start with a really solid set of expectations, and to your point earlier, which was also great, when we have a loose set of expectations, our plans aren't well defined or whatever, that kicks me over into cost plus mode. Versus recently I did a project that was smaller, a past client moved into a new home, they wanted a small scope of work done right before they moved in, and I went in and gave them a fixed price bid to do it all, and it was best for that client and that project. So I think any builder who says that it's one way and everyone else is a crook who's doing it the other way, I'd drill down on that a little bit more if I was a client and ask some follow-up questions about why that is. And they should be along the lines of what we're talking about today. What's in that contract? How many budget line items are there? How many assumptions have been made that aren't based in a quality detail on a set of plans? And how well did we as the builders share that with our client?

So I've evolved my business. Every bid I do, I redo it. So the next time I do it better and differently if I saw that there was something that could have gone better. And normally those are trauma informed, right? We had a dispute, there was a misunderstanding, there was a "I thought you were doing this," and you know, I'm telling them no, we were doing that, and I have to go back and look. How clear was my documentation that I gave to them on that detail? And if I didn't do a good job, it's going into my template. Next time we're making sure that we make this way clearer.

Okay. So when a client comes to you and says, you know, here's my plans, I want to do this project, I've been working with my architect for six months or whatever, and they hand you this set of plans, do you offer two different options for the client or do you review their — how do you — what's your process? What are your deliverables early in the process when you first meet a client all the way to getting to the point where you're up to the contract stage? What are your deliverables? What's your process? And I want to think about it from the client's perspective too here. That might help strike up some chat here.

Hundred percent. You know what came to my mind when you said that is every client should clip that sentence and write it down and take it to their interviews with their builders because that's a huge question. So I just recently developed something that helps with this, which I call Define and Align. So when I first meet with somebody, assuming they have their plans, I'm gonna go over them with them and I'm gonna learn — I'm gonna do like a exploratory meeting with them to go over what they're planning, what their budgets are, get as much information out of them as I can. And I'm ascertaining at that meeting what they do or do not know about, how well researched are they on what they want.

And then I prepare a document called Define and Align. And the way I produce my numbers, I have 20 spots that are filled with material selection. So roofing, windows, tile, hardwoods, all those things. And I've written down what the four most common materials are, what's more and less expensive, and why it might be important for their home. Like a roof. If you've got a flat roof, you have to use certain materials. So certain designs drive certain materials. I am floored all the time when people will tell me I had no idea that, say, a tile

roof was more expensive than a composite roof. To me, it seems like common sense, but I got to step back and say it's not. And so I will give that to my clients so that they can go through and start that process for themselves of identifying okay, I do see the shingles are going to be more expensive than the lap siding. So maybe I don't want shingles on my whole house because that's going to blow my siding budget. So I start from the very first meeting layering in information to help them back it, and I show them a copy of what my bid looks like. So I do it both digitally and paper. I make one for myself and I give it to the client the exact same document. It's like a three to four inch thick three ring binder and I show them that. Every phase of construction has a full written scope and then full backing documentation. So material selections. It would be every single plumbing fixture they picked and hopefully they did pick because otherwise

Now hold on. Is this before I mean, you're talking about cost plus and none of this stuff is decided yet.

No, I'm just showing them what it looks like. So what I'm doing is I'm setting an expectation for them of what I'm gonna do so that they have a visual of what this, what I'm gonna produce for them as we go along. So I'm not giving them one for theirs.

Wait, when you say as you go along meaning as you're building the project?

No, so what we'll do is, so that's the first meeting, is I will give them some information to get their juices flowing on making all those selections. I'll show them what it looks like the final product once they've made all those selections. And then we go through, I have a process that I take clients through on filling in all of those blanks.

So we have a template, we have a process that we go through to fill in all those blanks of every detail that creates the scope of work. It's pre-construction, it's a pre-construction process, which is a whole other topic for a whole other podcast, but that is the process of getting from first meeting to this filled out scope of work and contract.

So you're saying that you're doing all this before you actually provide any kind of budgetary numbers to the project. Is that what you're saying?

Yeah, we'll talk, in the early meetings we'll talk in, so new homes, we'll talk in cost per square foot ranges. A home like this, once I understand what all's going into it, does it have a pool? Does it have outbuildings? I'll gather all that early on and based on that I give a range, based on the quality, where they're at in town, their own feedback to me, what I see on the plans, what I see might be missing from the plans. I'm bringing that all in through that first meeting, and then we'll talk maybe about a range. So I might say this might be between 400 and $500 per square foot. Depending on how much information they give me, I can tighten that range up more. Because we want to make sure as early as possible that we're in alignment. If they said my budget was $200 a square foot, I'm probably not having that meeting with them at all. So there is some upfront conversation. I think in our last conversation we talked a little bit about this, that the architects I work with do have those conversations in advance with the clients in the same way to make sure that they're not designing something that's never gonna get built. So we are having those very early on, but then we're refining them every step of the line, every step on the line that we take them through, assuming we started in the same ballpark.

So how accountable are you to this budget number? Because in effect, it sounds like what you do is you have a preliminary conversation about, once you study their plans and understand the high level scope, the pool, the cabana, the basement, have a high level understanding of the project without knowing if they want inset style cabinets or raw particle board cabinets, whatever. You know, you're just kind of getting a high level and you say, look, this job can range anywhere from four to five hundred dollars a square foot. At four thousand square feet, you could be upwards around two million dollars for this project. So you're kind of doing that almost as a qualifier, it sounds like. Are people really even in the right universe here? And then that number's gonna stick in everybody's head forever, no matter what happens, because that's my experience with homeowners. Right. And as a homeowner, kind of what else you got? That's what you got. So and it's almost always the case where, that's too much. I'd rather be at one point five million. What can we do? And of course we all have millions of ideas of what we could do to a certain level. You still gotta put plumbing in, you still gotta put electrical in, you still gotta put HVAC in, you still gotta put the foundation. When you start narrowing it down, right, there's really not, of the entire project you probably have I don't know, twenty percent of drivers that maybe you can work with, the roofing, the flooring, the windows, maybe it's thirty percent, I don't know. But

And there's a point at that process too where risk is involved because now if I'm value engineering into a set of products that have potential issues, I put in lower level LVPs, now they're squeaking, now they're moving around because they had a cardboard component to them and humidity made them move. And I'm now the one there with the homeowner trying to fix a problem that was generated because we value engineered too far. So that's a whole other bunny trail I won't go down, but I do think it's important for people to understand that. Conceptually, there should be a limit to value engineering to where we're not going into products that are going to have issues that they won't want. So that is a part of the process too. But yes, people lock in a number, but you have to have the conversations about numbers. Yes, the process of anchoring is real and people will latch on to the most idealistic version. So if you said four to five hundred, they're gonna latch on to the four hundred, and then they're gonna figure out how they can get that lower. And that's this whole process. It's open book. So you ask me how much do I own that. Well, we own it together as a team because we're gonna make all those decisions together, and then they're gonna sign off at the end saying, these are all the things that we selected. This is where we are today and we understand it. And then if we change it, we're going to document that as we go. It's not just going to be willy-nilly. It is what it is. I'm accountable for things that change from that original set of expectations. If one of my contractors damages one of my other contractors' work, I'm not billing the client for that. That's not part of my cost plus that I'm just billing the client. There's still a relationship and trust that has to be, we have to think about that with all of this, that with our clients, we can't just do whatever.

Well that's another debatable one, right? A lot of these contractors think, cost plus. My margin's protected one hundred percent. I can do

Maybe until

I can just, my guy put the beam upside down. It's cambered the wrong, we gotta get the crane back out here, we gotta reset the beam. You know, it's during the course of framing. There's no real identifiable isolated task that's been assigned, perhaps, to repair work. So reframing occurs, the window got put in the wrong spot, the guy's gotta move it over a foot, and the shear wall has to be. I mean, it just goes on and on and on, right, with the mistakes that are made by subs, by your own employees. I mean, it happens on every single job to some degree or another. So is the customer paying for that? And how do they know they're not paying for that? And how do you in your particular business identify these mistakes that are made and extract that out of the billing. And that might be a whole other episode, but anyway, the billing is occurred. And with a homeowner not being on the site knowing something

did or didn't get wrong, and sometimes it's subjective and it's because the plans weren't clear. So we had to move the window over and now the debate occurs. This is one of my little pet peeves about cost plus. How does the homeowner — and yeah, you should be trustworthy and yeah, you should be honest and yeah, it's about relationships — but honestly, I don't know if that is consciously brought forward all the time, even by great contractors.

Chad (: 31:15

No, it's not. It's not. And that goes back to the risk thing. So that's a great reentry point for the risk. If I'm doing fixed price, I'm just lumping that in and saying I know that things are gonna go wrong. I know that this may take a little bit longer. I know that my material prices are gonna go up during construction. So what I'm gonna do is I'm going to buffer that. I'm going to add extra into those line items. I'm going to add extra into my own numbers to buffer for that. And this is the part that drives homeowners crazy.

Homeowners think they save money in a fixed price because there's certainty. That certainty does not mean that you're saving money. Certainty just means you've been given a number that factors all those things in. And you just made a great point about how does a homeowner know? Well, in fixed price, you will not know. And the builder might have more things happen than they anticipated, and they would eat it in that scenario. Or the ones who have been doing it long enough and are really good at pricing fixed price will have enough of a buffer plus some, because everyone I know who does fixed price makes more money than people who do cost plus.

I'll say that again. Every builder who knows what they're doing and does fixed price makes more money off their clients than people who do cost plus. There could be younger builders who really hurt themselves doing it, and the client may get a better deal in that case. But those builders don't tend to stay in business very long and they're not there to service you for the life of your home a lot of times because they fell down too hard on some of those fixed price jobs, ate too much money, and couldn't survive from.

William Reid (: 32:49

Yeah. That's a good point. Well, actually I'll let you continue because I'm curious how you handle those situations where—

Chad (: 32:56

So what we do — and this has been probably the biggest thing that I have evolved, and we could do a whole other podcast on billing — is I now, because I'm giving them a full transparent bid, I'm giving them full transparent billing. And I know not everyone does this the same, but I'm sending every copy of every invoice every month, including my own internal accounting reporting. So they see everything, every penny. And I have it broken down and I will do an explanation in my bill of anything that deviated from the original expectations, even though it's cost plus.

So if framing was over five hundred bucks, they're seeing all the bills and I'll explain, well, that was because we reframed this doorway because you wanted to do a different door opening than what we wanted to.

William Reid (: 33:37

What do you mean by over five hundred bucks? What are you comparing it to?

Chad (: 33:40

Well, let's say the framing number was fifteen thousand dollars and now we're coming in at fifteen thousand five hundred.

William Reid (: 33:46

Okay, so you're saying that in your process you assign a value at the early stage before you go to contract or when you go to contract of how much you've budgeted for framing?

Chad (: 33:56

No, no, no. This would be when we're billing. So now we've put our contract in place and now we're building. So during construction is what I'm referencing.

William Reid (: 34:03

No, no, I understand that, but you — well, let me just go back because I'm curious how it links to how you structured your agreement with the client. How do they know that the billing is on track for the project that was originally talked about at, you know, four hundred dollars a square foot or five hundred dollars a square foot? That was the high level budget. Is there a second tier that drives deeper to give them more of a breakdown of what this four or five hundred dollars a square foot is?

Chad (: 34:35

Yeah. Yeah, that's what I was describing a little earlier. So basically what I prepare for them is a full quote. So for each line item in the construction build — we have I think like 40 some line items — I have a full written scope and all the backing information. So framing's a great one to use as an example. In my binder, which I give them both digitally and a paper version, it would have the high level of what the number is and where it came from. So in framing, it would have the 20 page bid from the lumber takeoff. It would have nails in there because the lumber takeoff didn't account for nails. I add 7% to that because I know there's gonna be rat runs, the stickers on the roof that they use to walk on the roof. Those things don't end up in the lumber bill.

I show them how I broke it down and longhand notes on where every single assumption and price came from. So when they're signing off on this, they have every bit of detail that I put into that bid, the exact same thing that I keep in my own office when I check bills. So as they come in every month, I'm checking my bills against that bid binder. We keep a physical copy on my office manager's desk and every bill gets checked against that. And then if it's different, we're laying out why so that we know before we approve it. It never goes out the door until we figured out why it would be different. And then we already know to explain to our client here's why this was different. There's a reason.

William Reid (: 35:55

So in effect you're bidding the whole job out.

Chad (: 35:56

Well yeah, I mean before we go to contract, yeah, we have to have everything bid out.

William Reid (: 35:57

Without — how are you doing that when you don't even know what kind of windows they want? Or are you getting all those decisions made? I know you talked about your — okay, so you're —

Chad (: 36:05

They have to make —

William Reid (: 36:09

So you're not entering into a cost plus contract without all of the decisions made. The windows, the doors, the cabinets, the countertops, the backsplashes, the HVAC, MEP designs 100% complete so that you can bid out the electrical and the plumbing and the mechanical. And let's remember that those details aren't on the plans often. Or if they are, they're mediocre at best. So you're bidding the HVAC system off of a couple lines the architect or designer drew on there just to get a permit. And then when things start to evolve, the owner says I want this, I want that, I want radiant heat.

I'm trying to figure out how you can actually assign a value to all of these items. Cost plus is notoriously aligned with, like I said earlier, mediocre or just minimal plans and detail. Not always, but if it is a set of plans that are a high level of detail with everything specified, then that warrants probably a fixed price because you know as a builder ahead of time everything that you're gonna be doing.

But it sounds like you're doing the architect and designer's job by figuring everything out, everything that the consumer wants, the client wants, in order to assign a more realistic budget in the cost plus method. And then it sounds like — because you said framing, $20,000, cabinetry, $30,000, whatever — and then as the bills come in, you're basically ticking them off of that allowance that you put in. Some of it's an allowance, some of it's actually hard costs, but the differentiation is important to understand too.

But you're — like now we're at, so the framing was at thirty thousand. Okay, well, week one, we're down to twenty six thousand dollars left in framing. Week two, we're down to twenty two thousand dollars left in framing and you just keep ticking down and ticking down, right, until you get to the point where you have zero dollars left in your line item that you provided the client and all the backup information, yet the framing's not done yet. Could be not done, right? What happens there then? Are you just paying your payroll every week? Let's say you got three more weeks of framing and you zeroed out on your allowance for framing, but you got your crew there for three more weeks. It's gonna cost you five grand a week or whatever. How does that work in the world of cost plus?

Well, this is where it all comes down to how well the bid was prepared in the beginning, whether it's cost plus or fixed price. So to your point, there's gonna be some allowances for things like tile materials, hardwood materials. Those are the things that I find is hardest for people to select without their house being built. Many people can't visualize those decisions until there's some three-dimensional framing at least going on for them. So there's always gonna be some budgets. But we're building this all as normally a team. So there's an architect, a designer, a homeowner, and a builder.

So as a team, we're defining those budgets. And to your point that you've brought up several times, the better the plans are, the better job we can all do at this. If the plans are weak or loose, these numbers are going to be weaker and looser. So it really comes down to that.

Let's highlight that right there because for a homeowner listening, I'm just gonna get up on my soapbox. But you know, for a homeowner listening, this is one of the biggest topics, right? What you just said is so important. The more mediocre, the looser the plans. I like that term, looser the plans. You know, the more risk, right, the more margin for budget increase. So when a homeowner's working with their architect, and they know now, right, and that's the goal, what we're up to right here. They know now the difference between cost plus and fixed price. And they know that the more details, the more information that they can deliver to the person that's supposed to execute the plan, not design the plan, the safer they are regardless of the business model or the pricing model, contracting model they selected, right? The more detailed, the more specified they are to a builder, the less risk they have. They start to close in that margin of getting that phone call on a Monday morning that says, man, yeah, sorry, now that you want this, you know, I know we talked about six months ago or a year ago we talked about four or five hundred dollars a square foot and I gave the line item for the cabinetry, but I hear you just met with the cabinet maker and now you want the cabinets to go to the ceiling for twelve feet and you want an eight inch crown and you want flush painted inset with glazed finish and you want all this stuff. By the way, that's gonna add another fifty thousand dollars to the bid and multiply that times three or four or five, ten times during the course of a project, their budget could get blown up during the project, right?

As opposed to hammering out a lot of those details during the design process, meaning they're still in the driver's seat. If they know that the cabinets are 80 grand instead of 30 grand now because of all the decisions that they made with the designer and with the builder involved, they can make more of an informed decision, right? At that point to be sensitive to their budget. But they get into a situation where you're under construction and you're getting ready. They need to push the button to order the cabinetry and everything's going on and everybody's making decisions haphazardly, not knowing that there's more ahead of them that they don't know about that's gonna cause more potential escalation. So it's almost like they're starting to, it's starting to slip on them, right? The project's starting to slip on them. And the fear, the big fear is that they don't know what's coming around the corner next. And also you're doing a lot of the design work.

And you're doing it during construction. Let me ask you this. Have you had projects where they get delayed because you are acting as the person designing. When I say designing, I mean helping them pick out all the materials and you know, and getting so that you can get ordered on time so they can be delivered on time, so you can install on time. Have you run into any of those kind of problems?

Yes, earlier on in my career where I was playing the designer. So I should clarify, there is a designer on all my projects. That is a non-negotiable because of what you just described. Because if the builder is playing the designer, that's a whole job unto itself. And then you're not on the job. So I'm not doing that. So let me back up one step. When we're defining all of the categories, the quotes that we're putting into our contract and all those numbers, we're utilizing the architect, the designer, and the homeowner through a series of meetings as the plans have been evolved and even when they're completed before contract documents, we've gone through and picked everything that we can.

And there are a few things like I've said that are budget related, like a tile or a hardwood floor selection. But we're giving them a realistic budget, which is another place I know some people will look at cost plus and say, these builders will give you lowball budgets to get you in the door, and then they'll start raising everything later once they've got you committed to contract. That's one of the nightmare stories you hear about the cost plus. Also can happen with fixed price. Because if I went in with fixed price and said, I can do the cabinets for this house for 30 grand and I didn't spend enough time with the clients asking them, what do you want? Do you want rifts on oak or is this going to be a paint grade cabinet? If I didn't go into those questions with them before we priced it, then even in fixed price, I could say, well, I could have built you this cabinet package for 30, but now, Mr. and Mrs. Client, what you want's going to cost you 80 because of your own selections. And that can have its own set of problems because it just wasn't well thought out enough in the beginning, like you said.

Yeah, yeah. You know, and I'm sensing we're probably gonna do a dedicated episode to fixed price contracting because there's so much to talk about, cost plus. But in effect you're kind of doing a hybrid version where you're not committing, you're not going to a sparse cost plus contract where you know, there's a lot of guys out there that take the plans. They go, okay, great. I'm not gonna make one phone call to the architect. I'm not gonna make one phone call to the interior designer. I'm just going to do a cost plus contract here for you, Mr. and Mrs. Customer, and I'm gonna put an allowance for all of these items that aren't, there's no information on the plans. And where's the soils report? And there's not enough information on these plans. The homeowner doesn't know that. They don't know that there's not enough information on the plans until they're told so and sometimes that doesn't get told to them. So they just say, okay, we're just gonna do the project on time and material or cost plus and good luck.

Where you're doing it, you're doing it a lot more responsibly, where you're like, hey, we'll do cost plus, but I really wanna at least do some due diligence here to make sure that you don't get blown away, you know, like three months after we started the construction. So you are almost like orchestrating the designers, you're re-engaging with the design team to extract out the information from them that probably should have been on the plans to begin with. Is that kind of what's happened?

Mm-hmm. And also I should say one more thing too is depending on whether this client's working with a bank, that may drive all of this. So a lot of the cost plus deals are being done in cash. And there are people that you referenced earlier that have the money to do that and can absorb it. A lot of people don't have the ability to just have an unknown max price. The smarter banks will force clients to put a contingency right in there to account for the reality that they're gonna change things and things may change.

There are some banks that demand fixed price contracts. So we can talk about this conceptually all day long, but the reality is how you're getting your financing may drive a lot of this. And it's what has informed a lot of my process because we have historically built a lot of jobs where people did have a bank loan, and the bank has a lot to say with how these numbers are put together and what they're going to sign off on, because then they come and do their own inspection of the work, and they may have

Chad (: 46:07

their own issues with how we're billing and pricing, and I'm not gonna throw that in as another bunny trail. But I think for any homeowner out there listening, keep that in mind too, because that may be as big of a decision maker as who's building the home is who's financing it or are you paying in cash.

William Reid (: 46:22

So why should a homeowner really just, why should they pick cost plus?

Chad (: 46:26

Why should they pick cost plus over fixed price if they had an option?

Well, I think it depends on all these things. So you asked that question a couple minutes ago that I said that everyone should copy and write it down. Ask your builder when you're interviewing with them, what is their process and what are their deliverables? And look at that. I think every client should look at a builder's quote before they sign a contract, like another finished one for another project. A sample quote.

William Reid (: 46:47

Yeah, like a sample one or something.

Chad (: 46:50

Yeah. So not just look at their product and not just interview their clients, but actually look at their deliverables. So that could be more than the quote. It's also what are the other contract documents that go along with the quote, because they're normally all wrapped together as one package and that constitutes your contract. And then what are the weekly deliverables and the monthly deliverables? So do they update you on status? How do they do billing, which I think should be a whole other podcast. Look at that. What does a contractor's submittal for payment look like on a monthly basis? If you have a bank, the bank will have their own and they'll force the contractor into it. So sometimes that will answer that question. But one way or another, a homeowner should know what all those things are.

William Reid (: 47:30

So like for example, if they said, well, let me understand your process, let me see what you do, and the builder might say, well, we have two options. Or they might say, well, we usually do a cost plus method of contracting with you, or whatever the terminology is that they use. And the homeowner should say, well, I'd like to take a look at how that works. I don't know what that is. I don't know how that works.

And what we're trying to do right here today is explain to them what the hell they should look for.

Chad (: 47:59

Yep. Yep.

William Reid (: 48:00

And one of the first things that you want to look for is, and just as my observation of where you're coming from, because like I said in the beginning, I've almost exclusively done fixed price, which we are gonna do a dedicated episode to that, I think, because we're accomplishing way too much here on the cost plus.

Chad (: 48:18

Yeah.

William Reid (: 48:19

But let me, I'd like to take a look and see how that works. Can you explain it to me?

The things that we're gonna wanna be looking for, the things that you're gonna wanna be looking for, meaning as the client, is you're gonna wanna be looking for a person, a builder that actually does do some due diligence up front to understand the project fully, not just purely from the plans. That could be as little as a few questions, as much as understanding what your inspirations are for the project. You see it in black and white on the plans, but you see the red tile roof. You see the all stucco exterior with the masonry covering half the house. And you see all this stuff that's not on the plan because it says on the plan, figure out with the builder what you want, a lot of this stuff.

Chad (: 49:07

Mm-hmm.

William Reid (: 49:08

Right. So you want to look for a builder that says, okay, well we do this, but I have a process. I want to understand the scope of work to make sure that when we start talking about the high level budget for the project, we're at least closer than nothing. And at the other extreme is there is no process. Right? The contractor just says, we just start Monday and I just bill you weekly and we'll see what happens. They won't tell you that in those words.

Chad (: 49:35

Yeah.

William Reid (: 49:37

But in effect, that's what happens. And the only people, in my opinion, that work great for that is people who don't care how much it costs. And there's not that many of those out there. They're out there, but there's not that many of those out there. And even then, some of those clientele can be the most demanding when it comes to schedule and it comes to quality and whatnot. So that's an interesting distinction, because there's this feeling, there's this gravitation towards cost plus for contractors because they feel like it's less work, right? They can just start the job, do what they do best, right? Building, right?

Well, it's not less work because purely the accounting functionality, you almost need at least a part time person, unless you only have one project going on or something. But you at least need help as a builder to provide the proper accounting for the client. And if you don't do that, that is where trouble starts. All of a sudden the invoices come in. Well, here's a countertop invoice. Here's another countertop invoice. Here's a third invoice for the electrician. What's this for? And all of a sudden the questions start coming up, the trust starts to get diminished. And then nobody's tracking the budget of the project. And then you're halfway in and their budget was two million and you're already at 1.8 and you're only halfway done with the job.

Chad (: 50:58

Yeah.

William Reid (: 50:59

Right? And this is where it can blow up on you. So this natural gravitation towards cost plus, and I'm not saying this is universally across most builders, because some of the most sophisticated high-end builders do this exclusively and it works great for them.

Chad (: 51:12

Mm-hmm.

William Reid (: 51:12

And it works great for the client. But that's because those guys, and you're one of them, they have a whole process to protect the experience, right? To protect the reputation of both the builder and the experience for the client. Otherwise the whole thing blows up is what I'm coming away with.

Chad (: 51:32

Yes. And you asked me that question and I only partially answered it. Why would somebody want cost plus versus fixed price as a client? They would want to value the transparency, number one. That's why I gravitated to it, because you brought up several really good points in that last piece of your conversation there, which is, it is more work for the builder to administer it. But at the same time, that's the only way to have the proper amount of full transparency that both I know that I'm tracking my own numbers right and that the clients can also trust it.

So I evolved. I didn't even, when I made this decision, I wasn't even conscious of the idea of fixed price versus cost plus. I was just trying to eliminate disputes and misunderstandings. And I felt like with every transaction, if I could get 10% better at that, that soon enough I'd get to something that worked for almost everyone. And that's how this evolved for me. It wasn't a conscious decision of one versus the other. It was what's gonna get my client the best outcome.

We're a hundred percent referral based. I don't run any ads. I don't have signs on my trucks. I know that if I do a good job and people trust me at the end, they're gonna refer me to their friends. And for 29 years that has worked. And I know there's a lot of people out there who will tell you that's ridiculous. You need to also have a whole marketing engine too. And I don't disagree with that. But by far and away the best leads come through referrals. And you don't get them if you leave someone feeling like you weren't trustworthy and that you didn't have enough transparency in your process that they could refer you to their clients, that you got that much trust from them.

And that's how it came for me. It came through just a process of an evolution of figuring out that's how I could get there. And I just, it doesn't have, yes, you have to have help. There is software that can help a lot with that. Now we have a process where as every bill comes in, it gets stuck into a folder immediately and it's being run through a process that makes it minimal on how much we have to do with that. But it does take more time. And I just got someone who brought me a contract

The other day, cost plus, no details. My attorneys told me you can't even do that, that it's not an enforceable contract because it doesn't have anything specified as to what you're giving them for what price. Tell me your process. So I explained my process the way we just discussed it in this conversation. They're like, my gosh, that's what I really want. I'll get back to you. I gotta go figure this out with this other guy.

What was that? Was that a contract they were already engaged with, a builder?

Yeah, but it was entered with no plans, no detail, no nothing. I looked at this contract and I was astounded that the client signed it because it just leaves them so open to the fact that they didn't even have plans. So he knew what they were going to build. So it said there will be a house of roughly this size, there will be a new driveway and that gave a rough scope because they knew what the client wanted to do, but there weren't even any plans yet. The builder got this client to commit to that and now he's wishing he hadn't. So just another word for the wise out there, don't sign a contract early when you don't have this stuff defined. Make sure you know all that we just talked about, what the builder's process is, what their deliverables are, all that good stuff before you ever sign anything.

Sounds like a whole other episode.

Yeah. Well, I hope not. I hope that works out well for him. I'm sorry when things like that happen because these types of things are what give all the ammunition to these horror stories that then get recirculated on social media and at cocktail parties where people say, my gosh, I had this horrible experience.

Going the other way, the flip side, I'll tell one quick thing about fixed price because I know we didn't dwell on this a lot. I see competition do this all the time. They'll give a fixed price, limited transparency on what they are. Framing is a great example. Excavation is another one. So you say, I'm gonna do the excavation needed to do the home. You find out that in the ground you hit some things you didn't expect, some soft spots, you ended up having to put more gravel in the driveway because the soil wasn't as stiff as you thought it was going to be. Now you're twenty grand upside down as the builder that's gone fixed price.

You're going into framing. Well, if I haven't defined framing well, here's what I do: I swap plywood to OSB. I go from kiln dried lumber to a green lumber. I bring in my B framing crew instead of my A framing crew and I make that twenty thousand back up. And guess what, Mr. Client, you didn't know it and now your builder swapped things out for you because there wasn't full transparency. They could do that. And a lot of people say the motivation of fixed price is to stay on budget and it is. The question is, how did they do that?

Well, the pushback I have there is that you can't apply a fixed price contract to a cost plus level quality of plans, right? That's where you get into trouble. And that's what you just talked about. So you can't substitute an OSB for the roof sheathing over a plywood because it says what it's supposed to be on the plans, right? You can't do any of those substitutions.

I'm a big advocate of fixed price contracting only because the plans and specifications and scope of work, those are three different things. There's the plans, which are the architectural plans, the structural plans, all the consultants, the MEP plans, the interior design plans. There's the scope of work. There's a narrative about each of the categories of construction that you already do that calls out the scope of work, what the heck we're doing for each of those categories that supplement the architectural plans and the structural plans and any of the other plans that are not there.

And then there's the specifications. It's all the materials and equipment down to the color of the grout on the backsplash tile. So the fixed price contracting method works extremely well only if the homeowner has hired a qualified architect and interior designer and has paid them to develop all of those drawings and details and sections and notes and material specs and interior elevations. And not just interior elevations shot out from a software program by an architect, interior elevations that are developed by an interior designer or collaborated on with an interior designer, the mantle design, the stone around the fireplace, the fireplace make and model, every single thing is specified ahead of time.

To me, that is the primo way to do a project. The problem is it's not done often enough because of a lot of things. One, it costs a lot of money to do that. It costs a lot of money to, well, I shouldn't say a lot of money, but it costs substantially more to pay your architect and your interior designer to figure all that out. The funny part is it has to be figured out at some point. Right. It's not like you're eliminating that budget.

What you're doing is if you're not specifying all that information ahead of time and getting the quality plans and stuff, you are doing that stuff just like you talked about doing. All of a sudden your builder is starting to get involved in that. And guess what? They reach back out to the architect, the interior designer, to bring them back into the fold to make all those decisions, right? Whether you're doing cost plus or fixed price, it doesn't really matter. You still need all that information.

And then the other thing is the project schedule. I don't know how many times it's crossed my mind, I said, my goal was to not have us making any design decisions after we broke ground. None. Now I never got there and we had to pick the doorknobs and we had to pick that kind of stuff. But my goal was to execute in the field, to provide my customer a one hundred percent dependable price.

And the more accurate, you were talking about all the fluffing and padding and all that kind of stuff in fixed price, it kind of goes back to the cost plus and the ethical moral aspect of it, right? Yeah, you could do that because you said, yeah, you know what, and this is behind the scenes as a builder, I'll put forty thousand in for the cabinets, right? And I'll just put that in for the budget and give that budget, right? And then when we really figure it out on my fixed price contract, I'll just do a change order, right, to cover my butt. Right. So that's what we would do.

We would actually force the design process to specify all of the design, then the product, get hard costs on every single item on the project and put that into the estimate. So the client's budget was 1.5 million. Everything they wanted came out to 1.850 because everything they wanted during the budget touch points of the process, the design process. Now remember, I was doing the design process with my own design staff, right? So I had full control. That's not as common as a builder being handed a set of plans saying, give me a price.

Right? And you're looking at it going, what the hell? I mean, what kind of wood do you want? What, I mean, it just goes on and on and on. So it's not almost like, it's that the client knows what they're getting themselves into from a price standpoint very early on, and it almost eliminates a lot of the problems during the project where things like that surface up, where what am I doing for this? What am I doing for that?

You're right though. It does not eliminate the unknowns, which obviously have to be disclaimers for a builder because we can't take responsibility for the septic system we found when we were excavating and things like that. So yeah, the fixed price contracting method is just a whole other way to go, but it takes a lot more time up front for both the design team, for the owner, and the contractor, right, ahead of time.

But I am a firm believer that you can build the project faster if you have all that stuff, all those ducks in a row. So you're just pushing buttons, ordering stuff, sometimes even before you start the project, right? The windows, you know.

Yeah. During COVID we were having to order appliances before we started because Sub-Zero refrigerators

Chad (: 1:01:28

were taking sixteen months to get. Some of them still do.

William Reid (: 1:01:30

Yeah.

Chad (: 1:01:31

But we're saying the same thing. There's many different roads up the mountain. But at the end of the day, the homeowner wants to have the highest level of definition in all of their contract documents that they could possibly get. Be that fixed price, be that cost plus. Whatever the case is, that is where you want to go. And I have well thought out architectural plans all the time that the homeowner looks at, doesn't really realize. We just finished one where the architect had drawn seven foot interior doors and I explained to them that they could do six eight or eight foot and they would save, I don't know, it was ten thousand dollars because the seven foots are not off the shelf. And they're like, my gosh, I had no idea that's what the architect likes to spec.

And I do want to point something out that's very important for homeowners. So you have kind of an ideal situation in the way you did it with design build because you kind of had more control over that than a builder who builds many different architects' plans. And many times these homeowners come with their own designer that they love. So the architect and the designer aren't necessarily in-house to the same company, right? So now you're trying to wrap your arms around all these people. So a lot of builders will have things in their contract that homeowners should pay attention for. I have this too that says, I'll give you a great example. Maybe an architect puts a more commercial style HVAC system on their plans. But when we talk to the homeowners, we design a more residential, straightforward one, and that's what's in my quote. If my contract doesn't specify what is prominent. So mine says that the specifications on my bid are going to override the specifications on the plans. So it's very important that homeowners understand that because to your point, if I have that note as a builder and I'm doing a fixed price and I do want to change from OSB to plywood, pay attention to what's in that contract document. Now that's not something that I would ever get involved in. But like the example of an architect putting a design in a plan that's just a boilerplate for them that we don't necessarily want to price because it's in conflict with our clients' goals. Now you can ask the architect to go back and change every detail in their plans to meet your specifications, and that's the proper way to do it, but some homeowners don't want to pay for that. So again, just be careful about every little bit of what's going into this documentation that creates the contract and the quote that you understand what we're doing and why and that it's well documented.

William Reid (: 1:03:47

So you're saying, let me make sure I understand. So you're saying that you were provided, let's just use that example. You were provided a set of plans to provide a price on, and the mechanical HVAC system was specified as a commercial grade, whatever system, the products, the make and manufacture, and everything. And then you substituted that, you took it upon yourself to substitute that to more of a residential system that you thought was more appropriate for a house and therefore less expensive. So that's what you included in your proposal?

Chad (: 1:04:21

Yeah, that would be with the client's input. This isn't me just freelancing that, but many times those will happen with their input. And now what we have is a situation where we either need to have the architect go back and rectify his plans, or that we just specify that what's in our specifications is what overrides. So it's a choice that you have, is what I'm saying, is when you're looking at your paperwork, make sure that it's clear what details are going in. Is it strictly, like when you're doing design build, you're quoting exactly what you designed because you designed it that way. Whereas a builder who's bringing in all these different plans, that's going to be all over the board on what those plans actually represent. Are they specific to what the client wanted and what's in alignment with their pricing goals? Or were they just a boilerplate detail that they put in there without a whole lot of thought to it? Mechanical is a great example of that because not a whole lot of architects have in-depth mechanical conversations with their clients. So there's things like that that exist in there. I've had many AIA architect plans that were really well developed with the clients, but when I started getting into it, they're like, yeah, we the door locations and sizes are right, but I didn't ever know that seven foot was going to make that big of a difference versus six eight, or yeah, I like that tile that she showed me, but it wasn't really what I wanted. So again, it's just thoughtfulness. Did the client and the builder look at every single line item and talk about what was in there and what the client is getting from the builder as their deliverable. Does that fully explain it in a way that they can understand so that there aren't those mid-build, this isn't what I expected conversations because that's my worst nightmare as a builder is to get the text. It's always at night too, right? After they've toured the house saying this isn't what I expected. And every time that's ever happened in my career, I've stepped back and said, I got to fix this. I don't ever want to go through that again. I need to be more clear with what I present back to them as my deliverable.

William Reid (: 1:06:11

It's just, the world I come from, it's just it's really hard for me to get my hands around, my arms around what you just described about the mechanical system and there's thousands of those examples in one project, right? It's like, now that you've changed, okay, let's say they're talking to a couple, two or three builders, right, about a project. They're getting bids, they're getting estimates, right? And so they're meeting with you and they and you say, well, I think I would recommend more of a residential system for this house and the owners, the client says, God, I don't know. And the architect never even brought it up to me. He just they just put what they have on their plan. So I don't know. Yes, tell me more. But then they go and they get another estimate from another contractor, right? And then let's say you've done that ten times on the project with different things, you know, different components, the electrical, the lighting, the plumbing, the patios, whatever. There's all kinds of different ways that you can massage a project. Any builder can massage a project to help it meet the budget conversation that you had with the client, right? That's part of the creative, almost artistic aspect of what we do, right? It's a solution provider, but then the, you know, and this can work both ways. Then the homeowner's talking to another builder and they're doing something similar, but in a different way and in different components. And then all of a sudden there's this confusion, right? Wait, wait, he included the residential, they the commercial, but they put the bigger patio, they put the this, they put the da. This is what homeowners go through, right? It's a nightmare. And then they end up making a decision based on sometimes they end up just making a decision on who they like, right?

Chad (: 1:07:49

Correct.

William Reid (: 1:07:50

And that's not necessarily the right decision. I mean, they might feel good about a person, but that may not necessarily play out, right, when it really gets into it. So where I'm going with this is I feel like it's the designer's job, the architect's job, to develop the plans to a point where the homeowner can say, yes, I feel good about this. I've been asked a million questions. I've answered a million questions with my designer, with my architect, and we've got it all down on the plans. And we've even got a set of specs, you know, for the project. I want to be able to take it to a builder, and I think contractors and builders would actually appreciate this, is take it to a couple guys and say, I just want you to look at these plans and these specs and give me a budget, an estimate off the plans. I know it sounds like too perfect, but you know, that to me is the ultimate goal, is right, so we can just spend the time, you know, providing the cost based on the specs. And then if we see things that aren't

spec'd out properly or incomplete, then we call it to the attention of the owner and that gets back to the architect, almost like in an RFI process. And then it circles back and then the budgets are revised based on the additional information that you needed. But it's so hard for a homeowner to navigate that process when the builder is and it's actually commendable that you do that because you're trying to solve the homeowner's problem, right? Which is balancing the project with the budget, right? But you're in the middle of it saying, well let's do this, let's do this, let's do that, let's go back to the architect, let's get all these design things and then they've got three different estimates from all different angles. So that's where I think

It is a problem. I mean it is a problem and you've described the best case scenario, right? That is thought all the way through in advance and that'll give a better, the better the plans are, the better the quotes will be as far as being relatively similar to one another because they're quoting the same details from the plans. But the reality is not every architect does that.

It's a dreamland, isn't it?

It is and not every client has the patience to go through that. Honestly, if I only limited my clients over my twenty nine years to the ones who had enough patience to do that all up front, I probably would have done ten percent of the work that I've done to this point in my career. So it's a bit of a coping mechanism to dealing with the people that aren't a good fit for that, yet they're good clients.

Right.

Yes, that would be ideal that it happened that way, but it just doesn't always happen that way. I would say the ideal for a builder like myself would be to be involved in the process early on, like we talked about in our first podcast, and to be a part of that so that it's happening real time versus doing it after the plans are done. And we do a lot that way, and that works really well because architects also are great about dialing in the details and a lot of them know a lot about pricing. They're not as good as builders are at value engineering because you're asking them to rip apart what they just put their creative energy into for the name of doing something lesser than what they had designed. So it is a bit of a tug of war sometimes.

And that's where the builder's role in a lot of these is to come in and say, I would like to build this really cool detail that the architect did too. But if you, Mr. and Mrs. Client, are saying that we can't do this project unless we cut 50 grand out, then now who's in charge of that effort? Who's going to lead that effort? And it normally needs to be the builder. Unfortunately. I would love it if other people helped more, but again, it's trying to wrap your arms around all the different things that go into this and make suggestions to value engineer. I think you've spoke to that a few times. Value engineering is almost always a part of a process unless you're the unlimited fund person, which there's fewer of those. But the builders I think have a role to play in that and should so that they're not just handed something where now, like I mentioned earlier, you've got specifications for things that you don't want to warranty. There's certain products that people will value engineer to that I've learned. I'll just tell people I can't take the risk of that. I won't do marble kitchens anymore. The last one I did, it was a European gal and she loved the patina of the marble. I made her sign a waiver that said, you know you're gonna put rings on this the first time you put a soda or an orange juice or a wine glass down and it's got stuff on the bottom. She's like, that's what I want. My family a hundred and fifty years back all had this. I want that. And we had antiqued a lot of stuff for her, so I knew this to be true. Six months later she's like, I hate it. I said, that's it.

That's it. I'm not, I'm just not doing it anymore. That was never a marble, was never a value engineer play, it's just an example of there are products we can put in to meet specifications or budgets sometimes that cause everyone more risk than they're worth to save the money.

Yeah. I think that one of the points we talked about in the past episode is if a homeowner can latch onto an architect and a builder at the same time, or maybe bring the builder in a little bit after the schematics are being developed, that is an ideal situation. Because you're not doubling the work. You're participating, you're helping massage the design and evolve the design by, hey, what about putting the mechanical closet over here instead of there? I mean just all kinds of different things that a builder can contribute during the design. And it's worth the client's time to even pay the builder to do that. And also it's their time to develop a relationship with a builder. And you can go around finding cheaper prices all day long. You could do that for your whole life. But what you really want is realistic expectations set and I think this really is the ideal situation. Whether it's doing the design build method, where you truly do have everybody under one roof, or you do a hybrid version, where the builder's involved during the process and the plans can evolve and develop. The Napa project I was telling you about, it was an estate project that I consulted with a client and he tasked me with assembling the entire design team, right? And all the consultants and the contractor, because I wasn't gonna be able to build it because it was too far away, and he was involved and we were both involved from the construction mind, right? And the plans were very well developed. I mean it was a very expensive project. But when was all said and done, when the plans were declared done, everybody already knew how to build the job. Everybody knew what was going on. They knew exactly, the whole house was built in our heads. We knew exactly what was going on and it was just more about executing the plan. So I would encourage everybody to do that. Just get a contractor involved early and develop as quality set of plans as you can.

Okay, well I lost Chad. His power went out up there in Oregon, but we got through a lot of information here on cost plus contracting. Our goal was to also hit fixed price contracting as well, but you can see there's a lot to talk about in the cost plus contracting. So I'm gonna schedule another episode with Chad and we're gonna dig into fixed price contracting so that you guys can learn as much as possible about that to make an informed decision. So that's what I had for you today. Bill Reid and as you know, I'm here to enlighten, empower, and protect you. Let's go make it a habit.