You’re facing a dilemma – do you undertake your home renovation under a fixed-price or a charge-up building contract? There’s one thing everyone knows about renovations, it’s that they can be expensive. We’ve all heard horror stories about homeowners spending thousands more than they wanted to, builders making mistakes and adding to the cost, and builds going way over budget.
It’s not always possible to avoid these problems, but choosing the right type of contract can certainly help. There are generally two types of building contract used in New Zealand – fixed-price contracts, and charge-up or cost-plus-margin contracts. Both have their advantages and disadvantages, and either can be appropriate, depending on the type of job you’re doing and how closely you want to monitor your budget. The most important thing is to understand the difference, and figure out what you want before you sign your life away.
Spot the difference
Fixed-price contracts are pretty self-explanatory. With this type of contract, the builder or company you’re working with will create a detailed quotation for your renovation project and the price within your contract will be based on that quote. Although these contracts can include exceptions for some elements of the build – for example, excavation and earth moving – you’ll generally end up paying the quoted price.
Charge-up contracts work differently. You’ll usually get a rough estimate of the project cost before you start, but the final price can be drastically different. With this type of contract, the builder will charge you for the actual labour and materials they use on the project.
If controlling your budget is important to you, a fixed-price contract is usually a better option. Because these contracts give you a price up front, they’re easier to budget for – and often easier to get finance for as well. Unless you have a large cash reserve put aside, banks can be reluctant to lend on a project without having a set price ahead of time.
When it comes to choosing a building contractor, fixed-price contracts can make it easier to compare quotes. A good builder or business will give you a set price with a breakdown of materials, labour and subcontractors, and a detailed scope of work, so you can pretty accurately compare what you’re getting and how much it will cost.
There’s also the argument that fixed-price contracts lead to your project being done more quickly. The idea is, builders lose money if builds go over time or budget, so they’re motivated to work harder, get things done more quickly, and find the best prices on materials. Of course, if you’re employing a reputable business, you should be able to trust that they’ll be working hard anyway, but this is a potential benefit of the fixed-price contract.
However, ‘fixed price’ doesn’t mean it can’t change. There’s no way to get a contract with every element fixed, particularly in a renovation situation when the condition of certain parts of the house can’t be seen or established, so there will always be some room for add-ons and price changes. Most fixed price contracts will exclude some elements from the price, such as excavation or foundation work. This means the price could rise if, for example, the builder found pipes that weren’t included on the council plans, or large rocks right where the piles need to go.
You might also be concerned that knowing they’re responsible for the entire cost of the build causes contractors to overestimate your build costs. Builders are acutely aware they operate in a free-market and need to remain competitive so you should still finish up with a price you’re comfortable with.
Charge-up contracts, also known as cost-plus-margin contracts, can be riskier. Because you start with a rough estimate and pay for the actual work done as you go, it’s harder to know what the final cost will be. Despite this additional risk and uncertainty, some homeowners prefer this situation as paying as you go means you’ll have paid for the work done – and no more.
While charge-up contracts are useful in some situations, they can have disadvantages as well. As the homeowner, you’re the one taking on the risk of overruns, which could mean you end up paying far more than the original estimate. Because you don’t know the price up front, they’re harder to budget for – and can make it harder to secure finance.
It can take 40-60 hours to accurately price a large renovation project. So when the homeowner is responsible for all the labour and material used on a project anyway, there is little incentive for a builder to spend this amount of time making sure their estimate is accurate.
Builders under a charge-up contract might also be less motivated to get the best prices for materials or labour, because they’re not the ones paying – and a few dollars here and there can really add up over the course of a build. Time can also be a factor – if a builder isn’t responsible for overrun costs, a build going overtime isn’t a huge problem for their business – but it might be a huge problem for you.
Your build, your choice
In many ways choosing the right contract is less important than choosing the right builder. Many of the disadvantages of both fixed-price and charge-up contracts can be avoided if you choose a professional, experienced and principled builder. Ensure your builder is prepared to put in the hard work up front by taking the time to carefully scope and specify your project to give you an accurate estimate or quote, whether you choose a fixed-price or charge-up contract. They should also do their best to keep things on time and on budget, even if you’re the one paying for overruns.
At MyHome Renovations, we use fixed-price contracts for all our projects. We provide very detailed plans and budgets before the project even starts, set everything out in the contract, and take on the risk of overruns. We find this way of working delivers a premium renovation experience – the homeowner knows exactly what to expect, knows exactly what we’re doing, everything runs more smoothly and the potential for disputes or disappointment is much lower.
If you’re keen to start an extension or renovation project, the team at MyHome Renovations can help – get in touch for a chat about your options now.
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