Building In The Hamptons? – Fixed Construction Price Vs. Time & Materials Contracts

Whether you are building in East Hampton, Sagaponack, or Sag Harbor, there are two very different methods for hiring a building contractor out here, and that decision can make a big difference to your final costs.

When you want to build an addition, or renovate the kitchen or bath, how do you hire the professionals that will perform the work? Most people assume that there is only one method; you contact several different contractors and ask them all for a fixed price bid. After all the bids come in, many people simply pick the least expensive bid, jump in with both feet, and hope for the best.

One of my partner’s favorite sayings: “You don’t always get what you paid for, but you rarely get more than you paid for.” In other words, beware of the low bid that seems too good to be true. There really are no free lunches in this industry, as labor and materials are both too expensive to be given away.

Now, let’s look at how the contractor established that fixed price bid.

Yes, it’s true that you don’t know the final costs until you are done, but in actuality the same is true for a fixed price bid. (Courtesy Photo)

Home construction utilizes a lot of human labor. Their actual daily output is difficult to project accurately for 6 to 8 months into the future. Unforeseen contingencies, weather, and the normal changes in the cost of construction materials are another estimating problem. Although an experienced contractor can create construction budgets, they are typically not fixed costs, and are really nothing more than educated guesses.

With a fixed price bid, a contractor must assume all the worst-case scenarios. Why should he (or she) take the big risks on your behalf? A 10% error can cost the contractor substantial dollars, all of which have to come out of their own pockets. Consequently, all the potential, unforeseen costs are added to your fixed price bid, even if the team is producing the work fast enough, or the price of lumber doesn’t go up.


The Time & Materials Alternative:


What many people may not realize is that there is another way to get the work accomplished. This alternate method has been around for centuries, and is called “Time and Materials,” or “Cost Plus” contracts (or hand-shakes).

Assuming your contractor has impeccable references from previous customers, this time tested method is typically the least expensive way to get a project completed. You will only pay for the actual work performed (not for the possible pitfalls that did not occur). It can be built exactly how you wanted it to look, and all without creating the conflicts of interest inherent between the owner (who wants the lowest price) and the contractor (who wants to make the highest profit).

Although an experienced contractor can create construction budgets, they are typically not fixed costs, and are really nothing more than educated guesses. (Courtesy Photo)

This alternate method puts everyone on the same team. The owner and the contractor become collaborators, not members of opposing teams with ultimately different goals. Is there added risk with this method? In the long run, I would argue no. However, many others would argue the opposite.

Yes, it’s true that you don’t know the final costs until you are done, but in actuality the same is true for a fixed price bid. The “extras,” and the built-in penalties for changes, make a fixed price bid just as risky.

So which method is right for you? The common wisdom is that renovations, additions, and rehabilitations are best done utilizing a Time and Materials Contract (like the American Institute of Architects “Cost Plus” contract), while new construction will typically utilize a Fixed Price Contract.