Well, that’s exactly what you’re doing when you sign a “Cost-Plus-Fee” (CPF) or “Cost-Plus” Contract for your custom Construction Project! Left unchecked, you will overpay for the work. Not you “might” overpay, you will. But you don’t have to anymore. Naples Custom Home Cost Consulting (NCHCC) is that “check”. We offer expert Owner’s Representative Construction Services to Clients anywhere in FL…and beyond.
So, you’re considering a proposal from a Builder for a project. How do you know the pricing is accurate? Maybe you have multiple proposals that vary considerably. Why is that? How do you go about comparing them?
Most custom construction projects are built using CPF contracts. CPFs are used because there are many unknowns that preclude Builders from determining a total, hard cost for the work, so they can’t offer a Fixed-Price. With a CPF, the Builder agrees to construct the project for a certain, lower Fee (usually a percentage of the actual, total costs) than what they would typically charge. In exchange for this concession, the Owner agrees to take on the cost-risk that the Builder normally would.
The Owner, then, is responsible for all of the Project’s costs – no matter what they end up being or how they come to pass.
Each Builder has the same motive – to be awarded the Contract. They presume that price will be the Owner’s deciding factor. Because of unknowns on custom jobs, each Builder is afforded considerable leeway when compiling their numbers. Therein lies the Owner’s problem:
CPFs not only empower Builders to provide pricing that’s incomplete (too low), they actually incentivize them to! Why risk losing your job by providing you a complete, accurate Cost Estimate that will be higher than what you’ll get from competitors? Since the cost-risk lies with the Owner, Builders can’t be held accountable to their Estimates. Further, with CPFs, Builders usually have little-to-no formal obligation to control the Owner’s costs. And why would they try when, in fact, they make more money the higher the costs are! Indeed, the more expensive the job, the higher the percentage of money Owners will unnecessarily overpay gets!
So, how can you know how legitimate any Estimate you’re considering at this point is? The answer =you can’t. And that is why, when you contract for a custom construction project, you are buying something without knowing how much it costs!
This is when you need to bring in a home building consultant, like NCHCC! How does NCHCC control construction costs and save you money? We perform the diligence that Builders don’t (because they don’t have to). They are reactive, we are proactive. We apply unique insights acquired over 25+ years of firsthand construction experience in FL to provide diligent Owner’s Rep services to Clients that have, or are considering, a project. As Cost drives the entire process (see Video), we’ve
developed – and now offer – a complete slate of Cost Management-specific services (see inset pic) that few other home building consultants do. Our specialty? Reconciling the Contracts and Estimates that Builders propose so that you avoid cost pitfalls and are empowered to make well-informed decisions.
Already signed a CPF with a Builder? Project already underway? We can be brought on to any Project, at any time just about anywhere. It’s never too late to gain – and maintain – control of your Project’s costs.
Investor that has, or is considering, a Spec home or renovation of an existing property? At NCHCC, we make you money by saving you money! By adding value to the job, we increase the equity in it and your ROI.
The goal is always the same: build the Project for the lowest cost, as quickly as possible and without sacrificing quality. At NCHCC, we strive to strike the optimal balance between Cost, Duration and Quality on every Project, without undermining Builders. Let us solve the equation on yours.
Know where you stand before you sign a Contract or take a stand if you already have. The sooner you call NCHCC, the better!
There are (3) main variables to a Construction Project – Cost, Duration (Schedule) and Quality. The overall goal is always the same: build it for the lowest cost, as quickly as possible and without sacrificing quality. But what is “the lowest cost”? How can one know that a job could have been done faster? Define “quality”.
Without clear answers to these questions, one can’t definitively say that they’ve fallen short of, reached or exceeded the goal. How close one comes to meeting each of these (3) “conditions” of the goal, then, is a matter of opinion – it is subjective.
Cost, Duration and Quality are all intertwined. A high-quality product will necessarily take longer to build than if it were less so. The work can be done faster, but at a premium price, etc. Schedule can be defined, but is notoriously hard to maintain and track. Quality is dictated by the Plans and Specifications, which themselves vary from Project-to-Project. There are established minimum Standards, so Quality can be better measured, but not universally. Ultimately, Quality is perceived.
But, (2) things are certain: 1) none involved want the construction to take any longer than it has to and 2) none want a low-quality product.
So it is that Cost is pushed to the fore. It can be measured – easily and by most everyone. It is flexible – affecting Cost, effects Duration and Quality. Cost stands apart because it controls and can itself be controlled. Cost trumps Duration and Quality. It serves to drive the entire process. How it is managed will determine whether a Project is successful – or not.
The overall goal is always the same: build the Project for the lowest cost, as quickly as possible and without sacrificing quality. It is like a math equation. It is Cost that will dictate the outcome of that equation.
By definition, Custom Construction projects are subject to change. And do they ever! Constantly, in innumerable ways. Changes to a project’s Scope of Work act as added variables to the equation, complicating it ever throwing it out of “balance”. Custom jobs, therefore, require a level of diligence that most Builders struggle to meet, much less maintain.
At Naples Custom Home Cost Consulting, we are Project Cost Management EXPERTS who strive to strike the optimal balance between Cost, Duration and Quality on EVERY Project. We balance the equation and see it through to a solution that best serves each Client’s unique wants and needs.
Let NCHCC “do the math” for you on your Project.
Any given construction project requires some combination of materials, labor, and equipment to complete its Scope of Work. Builders will ascertain a Scope of Work (SoW) from the information available at the time—plans, material selections, job-site visits, and meetings with the owner. Next, they will cost the SoW and propose to perform the work for the owner under some form of contract and for some form of compensation.
Ideally, the SoW is detailed and clearly defined. When it is, builders are able to cost the work more accurately and clarify exactly what they will propose to do. Their confidence in the information and their ability to perform the SoW empower them to take on all (or most) of the cost risk for the project and offer to do the job for a fixed price.
But custom construction projects are, well, custom. At any given point, they are subject to change. Put another way, at no point (prior to completion) is a custom project’s SoW completely and exactly defined.
Architectural and engineering plans are developed to define much of the Scope of Work for the project but must often be adjusted to compensate for the actual circumstances in the field. Architects also determine and specify many of the means, methods, and materials to be used in the building. However, they also want to allow for some flexibility, so some information is noted but purposefully left vague. Other information—such as exact material selections—is not specified at all because it is unknown at the time. Furthermore, changes—whether required or desired—inevitably and continually occur throughout the construction process.
All parties involved could take the time to determine and specify all of this unknown information, but doing so isn’t practical. For most owners, “time is of the essence”; they want to get their projects started and completed. So, to “fast-track” the project, builders become involved during design and development, working to price the job based on the information that can be determined at the time.
However, since the SoW for a custom construction project is never really 100% final, it is impossible for a builder to determine an exact cost for the job. Because they can’t determine an exact cost, they can’t offer to build the project for an exact fixed price.
A Cost-Plus-Fee (CPF) or Cost-Plus Construction Contract is a common agreement between owners and builders for custom construction projects. CPFs are designed to accommodate such ever-changing jobs. However, CPFs shift most of the cost risk from the builder to the owner. This seismic shift completely changes how the project is priced and proposed by builders to owners.
With a CPF, it is understood by all involved that the owner is responsible for all project costs and that the actual costs will vary based on what the complete Scope of Work ends up being. However, most owners take for granted that, even though the SoW is ill-defined, the pricing presented by one or more builders is more or less accurate. After all, these are reputable builders who’ve completed many custom projects—right?
Even a complete set of plans from the best architects will lack a considerable amount of information. Much of the SoW is still “to be determined.” Without this information, each builder is left to “fill in the blanks” (or not) themselves when pricing the job. Generally, builders provide owners with pricing that reflects the available information at the time. However, they should also account for the unknowns, especially those they could reasonably discern using their expertise.
The problem? They don’t—or at least not very well.
Some builders do try to provide clients with good estimates, but each builder approaches this differently. This inconsistency is one of the major reasons why the pricing that owners receive from different builders is often incomplete and varies significantly, further complicating matters for owners.
So, why don’t builders provide better estimates to clients? Do they lack the personnel or expertise to do so? Maybe. Are they unable—or hesitant—to invest the time required to develop a thorough estimate for a client who might not contract with them? Possibly.
Most clients will want to contract with the builder offering the best overall pricing. A builder competing with others for the same project is often tempted to quote a low price. These incentives encourage builders to keep their pricing as low as possible, and at this stage, they are empowered to do so. Including low budget amounts for parts of the SoW—or excluding them altogether—is an easy, justifiable way to provide a client with a “competitive” estimate.
Are builders purposefully using bait-and-switch tactics? Ultimately, no one except the builder can know for sure why they fail to provide clients with the comprehensive, accurate estimates they could and should.
The builder’s stance? They claim the pricing they provide can only be as good as the information issued to them for pricing.
The solution? Provide them with more, better information. How? Through written specifications.
NCHCC will develop a custom set of written base specifications for your home to supplement the plans during the bid process. These base specs will reference the project plans and reflect the job’s location, existing conditions (for remodels), and size. We will seek and incorporate your input. Finally, we will ask the architect to approve the base specs to ensure they align with the Scope of Work as they see it.
By packaging written specifications with the plans being sent to builders for pricing, you ensure that the pricing submitted is much more complete and consistent than it would be otherwise, allowing you (or NCHCC) to better assess it. The specifications can then be incorporated into the construction contract to ensure your home is built to meet them.
Written specifications provide everyone involved with clear, detailed information. Information is power. Empower yourself and your team to succeed by inquiring about written specifications for your construction project!
In Florida, property owners seeking to build are stymied by ever-increasing construction costs in an unresponsive construction market. Builders only make things tougher by offering one-sided contracts with high fees added on top of unreliable cost estimates that always prove to be too low. How, then, can owners push back and make their projects more viable and equitable?
Simple: by significantly lowering those construction costs. And the secret to doing that…is being an Owner-Builder.
Few people know about this legitimate option, so let’s start there. What is Owner-Builder construction? Property owners have the right to remodel or construct a home that they will live in without having to hire an overly expensive builder to do it. An Owner-Builder takes advantage of this approach to maximize overall construction cost savings. For most, this represents a significant amount of money—money that could be put to better use. The savings might be used to help offset the property’s purchase price or pay for upgrades to the project, thus increasing their home equity as well.
However, with reward comes risk. Owner-Builders enjoy complete control of the project, but they must legally take on all of the risks and responsibilities that a builder typically would. Maybe they have some experience in the construction industry. Maybe they just enjoy the process. Maybe they’ve simply done the math and concluded that the benefits outweigh the risks. The value is there. Indeed, the more expensive the project, the more substantial the potential cost savings.
Still, Owner-Builder construction is about more than just meeting legal and insurance requirements. Owner-Builders are tasked with managing the entire construction process. To be successful, they need help from someone with ethics, experience, contacts, and clout. Someone to protect them by mitigating the risks and helping handle their many, varied responsibilities.
In short, Owner-Builders need someone they can TRUST, like Naples Custom Home Cost Consulting (NCHCC).
We build that TRUST by advocating for, and presenting clients with, the many choices they have, advising them on the differences between those choices, and guiding them through the entire construction process to see a project built that meets THEIR needs—whatever they may be.
We offer a complete set of services to assist—help that other builders don’t offer. We can be hired as an Owner’s Construction Manager and, if they choose, perform nearly all of the same functions that a full-service builder would, including managing the actual construction of the project for them. To help, we can call on a deep group of industry-wide contacts—across ALL price points—developed over 25 years in SWFL: a deeper “bench” than any other firms have.
Owner-Builder construction offers owners the greatest potential upside. If they have the fortitude, NCHCC can help them realize that potential.
If you were to buy a new, typical home to be built, you would purchase it at a certain, Fixed-Price. Let’s say your home will cost $100,000.
For that $100,000, you – now the “Owner” – get a defined home built to final plans and specifications. For example, your house will have wood-framed walls, a metal roof and tile floors.
Builders can offer you a Fixed-Price because they are building a defined product. They determine the cost to build it and add in a figure for their overhead and profit. Traditionally, that figure is about 18%.
So, the Builder expects your $100,000 Project to cost $82,000 to build and that they will make about $18,000, or 18%, overhead and profit. To keep it simple, let’s suppose that calculation looks like this:
$82,000 + $18,000 = $100,000
Cost 18% Profit Fixed-Price to Owner
Now, if it ends up costing more than $82,000, the Builder loses profit. If they manage to do it for less than $82,000, they make more profit. Whichever the case, the Builder is obligated to construct your home, as per the plans and
specifications, for that Fixed-Price of $100,000 – not a penny less or a penny more. This is the “risk/reward” system that drives Builders to do everything they can to control what are THEIR construction costs.
With Fixed-Price Contracts, the Builder, not the Owner, takes on the risk for all of the Project costs – no matter what they end up being.
If, however, you were to build a new, “high-end” custom home or remodeling project – like those common in SWFL – the work would almost certainly be done under a Cost-Plus Fee Contract.
“Custom” homes and remodeling projects are complex and (usually) large. The plans and specifications for them are always changing. They are never really “final”. Still, most Owners want to get their Projects done as soon as possible.
They have a budget in mind for the Project and believe that, ultimately, it will cover the total cost of the work.
So, at some point during the Pre-Construction phase, preliminary plans for the Project are issued to as many as (3) or more different Builders for pricing – even though the Builders lack the information that is needed to properly price the work at the time.
As they lack final plans and specifications, none of the Builders can be certain what the ultimate cost to build the home will be. Since they can’t determine a definite cost, none can offer to do it for a Fixed-Price. Instead, they will propose to do the work on a “Cost-Plus-Fee” basis.
Each will offer to build your home for a lower overhead and profit figure – or “Fee” – than the typical 18% they would expect to make on a Fixed-Price job. Say, 16%. 13%. Sometimes even less.
In exchange for the lower Fee, the Owner agrees to bear the risk for all of the costs of the Project. Sounds reasonable – right?
The issue isn’t the Fee, it’s with the Project costs. The problem? The Owner doesn’t know what they are! Builders may provide them with “preliminary” cost estimates, but none of them are accurate, because they can’t be. As the
information necessary to construct the Project is still incomplete, so are the estimates. In short, estimates from Builders for Cost-Plus jobs are invariably much too low because they CAN be. What good is a well-negotiated Fee if the estimate it’s based on doesn’t hold water?
The tables have been turned. Not only is the Owner now responsible for all of the Project costs, they can’t know, for sure, at this, or at any point over the entirety of the construction process what the true costs are or will be! Now, the
calculation looks like this:
$????? + $????? = $????????
Cost + 12% Profit = $???????
With Cost-Plus Fee Contracts, the Owner, not the Builder, takes on the risk for all of the Project costs – no matter what they end up being or how they come to pass.
Inevitably, Budget Creep (in tandem with “Scope Creep”) begins. Project cost increases seem to sneak – or “creep” – up as the work moves along, often as small increases, over time, over several cost line items. By the time the Owner
realizes their costs have spun out-of-control, it’s too late.
Owners with Cost-Plus Fee Contracts are exposed to a higher level of risk than they may think, especially in the “inverted” Construction market. They can’t know what their Project costs are, or will be, with any certainty, at any time. They can’t know from or control how hard their Builder is really working to manage their costs for them.
Naples Custom Home Cost Consulting CAN know all of these things and offers a full range of Construction Management Services to assist Clients. When hired as an Owner’s Representative, we work to prevent Owners with Cost-Plus Fee Contracts from unnecessarily overpaying for their Projects by mitigating their risk and “pushing back” on their behalf.
In a typical market, there are a certain number of construction projects – both new homes and remodeling – to be built each year. In most areas, there are usually a few major Building Contractors (BC’s) that do the majority of that work. Within those areas, there are usually several established and qualified Subcontractors – or “Subs” – representing each Trade – like Carpenters, Roofers, Painters and Plumbers – readily available to perform their “Scope of Work” for the BCs.
This work is highly desirable to the Subs because it is consistent and wellplanned. But, since there is only so much of it, there is then a “demand” from the Subs for the work. They must compete to “earn” it from the few BCs.
They strive to do this by:
The Subs that successfully earn the work are usually well-established. They have adequate, experienced staff – for both administration and to perform the work in the Field – that they have employed for a long time.
In a typical Construction market, there are more Subcontractors available to do the work than there is work to be done. This creates a “demand” for the BC’s work that drives each Sub to do all that they can to earn it. Most notably, Subs know that they MUST submit competitive pricing to even be considered for the work.
Florida is an atypical Construction market. There are consistently many more construction projects to be done – both new homes and remodeling – than in most other areas of the country. Here, there are several different Building Contractors (BC’s) vying for that mostly “high-end” work.
However, In Florida, there are NOT enough established and qualified Subs, mrepresenting each Trade – like Carpenters, Roofers, Painters and Plumbers – readily available to perform their “Scope of Work” for BCs, mostly because there are not enough qualified people available in the local labor force to staff them.
In Florida, the market is “inverted” – there is more work than there are qualified Subcontractors available to do it.
Here, the “demand” is FOR the Subcontractors!
General Contractors must compete for THEIR services.
General Contractors must seek THEM out.
The typical market is “turned on its head”.
In Florida’s Construction market, the “tail wags the dog”!
Here, then, Subs do NOT need strive to “earn” work that will mostly come to them anyway. So, in Florida, many of them:
Highly skilled professionals are particularly rare. That means there are even fewer qualified Subs available to perform the amount of “high-end” work there is – the work usually done under “Cost-Plus Fee” Contracts. Often, Builders doing “high-end” work “need” these Subs more than the Subs “need” the Builders. These Subs are even more empowered than the rest. Some can “pickand-choose” the work they take on. Many can all but dictate their terms – like price and schedule – to the BC. BCs have little leverage to negotiate and often don’t even try to.
The “Inverted” market “lowers the bar” for the entire construction industry.
In the “Inverted” market, there is more work than there are qualified companies to do it. The market forces that usually drive competitive pricing and high quality are all but absent, making it difficult for Builders to control Project costs. This leaves Owners – especially those with risky Cost-Plus Fee Contracts – exposed to high pricing and poor service.
Naples Custom Home Cost Consulting offers a full range of Construction Project Management Services to assist Clients. When hired as their Owner’s Representative, we strive to control their Project costs and maximize value,
while always keeping the “big-picture” in mind. We work with – not against – Builders to navigate the “Inverted” market and achieve our shared goal: successful completion of the Client’s Project.
You wouldn’t buy something without knowing how much it cost – right? That is why most things, including typical new homes, are sold for an exact, “Fixed-Price” (FP). With FP homes, the Builder has determined – and has a strong incentive to control – what are their costs.
But Custom Homes and Remodeling Projects are different. Builders can’t know, exactly, what resources will be needed for them, so they can’t offer an Owner a FP. Instead, they will propose to do the work on a “Cost-Plus-Fee” (CPF) basis. With a CPF Contract, the Builder provides the Owner with an Estimate of the job costs and agrees to accept a lower Profit percentage than usual. In exchange, the Owner agrees to pay for all of the Project’s costs – no matter what they end up being or how they come to pass.
CPF deals work in a typical construction market. But Florida is not a typical market. It is “inverted”: there is more work than there are resources available to do it. Unprecedented Material cost increases, Labor shortages – and that was before Hurricane Ian. All of the market forces that drive competitive pricing and high quality are weakened, pushing construction costs up. This means that Project cost control is challenging on every local construction Project, whether the job is a FP or a CPF.
But with a CPF deal, now the Owner (you), not the Builder, are exposed to all of the delays and cost risk in a market that exploits those exact vulnerabilities. That’s the “injury”. The insult? You’ve left a fox to guard the henhouse: a Builder who isn’t obligated to control your costs and who actually makes MORE money the higher the costs are!
Builders must compete for said resources. The Fox doesn’t raid the henhouse with ill-intent for the Farmer, he does it because chasing down hens otherwise is difficult. In fairness, most Builders, likewise, aren’t actively trying to take advantage of Owners. Compromising an Owner’s time and money is simply the easiest way for them to navigate the “inverted” market and compensate for their own poor Project Management. How will you know how much of your time and money is being compromised?
Owners like their Builders. They rely on them to act in “good faith” to manage costs, but assurance is not insurance. All Foxes Builders must, ultimately, put their best interests ahead of yours. So, who’s really in your corner?
Owner’s Representatives are. They work with the Team, but solely for you, ensuring that your needs for the Project (cost, schedule, quality) are met. With 25 years of first-hand, local experience, Naples Custom Home Cost Consulting offers a full range of Construction Project Management Services to assist Clients, including Owner’s Rep Services that no one else ever has or can. We take every opportunity to create equity by adding value to your home and know how to keep Builders in check without undermining them.
With CPFs, YOU ARE buying something without knowing how much it will cost. Are you really on Budget? Schedule? Is your Project being managed as well as it could be? Hint: it’s not. It’s everything you won’t/can’t know about your Construction Project that, now more than ever, will cause you to incur considerable, but UNNECESSARY, costs.
So, DON’T. Protect your investment. Enjoy peace-of-mind. Let Naples Custom Home Cost Consulting do the “knowing” for you.