Why Fixed Bid Pricing can save you thousands of dollars during your remodel.
When talking with contractors about your remodel, you’ll likely hear a few different terms when they talk about how they price their work: Time and Materials, Cost Plus, and Fixed Bid.
Each of these types of pricing can have a large impact on both the quality of the work and the final cost of the project. Understanding how each of these work is a crucial part of deciding who to work with. We’ll outline how each system works and list some pros and cons of each system below.
Time and Materials
With a time and materials bid, a contractor gives an estimate for how long the job will take and an estimate for the cost of materials it will take to complete the job. Materials and labor are marked up by a percentage to create a profit for the contractor.
This can be a great system when you have an efficiently planned project. If your project has a lot of unknown variables, time & materials bids can allow for quick changes during construction. If your project is very straightforward or if your contractor has completed similar jobs many times, they may be able to give a relatively accurate price range when estimating the work.
However, there are several downsides with this system, especially if your contractor is less experienced. Because the “clock is running” for as long as it takes, there is little incentive to plan out the project in detail, work efficiently, or use materials that keep costs down. Time & materials bidders may hire unskilled or underpaid labor because it increases their profit margin on the job. Worse, without a robust tracking system with dedicated staff, system lends itself to blindsiding homeowners with cost overruns at the end of the job.
A contractor may underbid on the job (to either win the job or because they don’t know what it will really cost) and then end up hitting you with a much larger bill when the job is completed. Because there isn’t typically much planning ahead of time, you may be asked to make quick or last minute decisions about the materials and design of your project. That adds an extra element of stress to the process that could be solved with planning up front.
Pros:
Time and materials jobs, when efficiently managed and run by pros, can potentially cost less than other pricing models.
This type of pricing is more flexible than other models. It can accommodate changes in scope during the project easily.
This type of pricing works well for jobs that don’t have a defined scope. If speed is your priority, this model can allow for a quick start.
Cons:
There is a lot of uncertainty about what the finished product will cost.
You don’t know what the actual costs of the project are.
Because these bids are easier to make, many less experienced builders use this model.
Builders are often less skilled or underpaid to increase margins.
Time and materials bidders can inflate the actual cost of materials to increase their margins.
Because profit is built into the time and materials, costs can balloon as the job takes longer than expected or as change orders are made.
If your project takes longer or costs more than expected, your contractor makes more money.
The most common appeal of time & materials bids is that the initial estimate is much lower than other bids. Because a T&M bid doesn’t require much preparation to give, many companies give quotes that are much lower than they should be.
Once you’ve committed to the job, the builder doesn’t have the incentive to work efficiently or keep your costs down. Costs can balloon out as the job continues, and you end up paying just as much as you would have with a more experienced company using an alternate method of pricing.
That being said, a time & materials bid is not inherently bad. With enough forward planning, they can provide flexibility to the customer and a more realistic estimate of what the completed project will cost. This type of agreement requires a lot of trust and a lot of communication with your builder. If you’ve worked together in the past and have received on budget and on time work, you’re much more likely to have a successful remodeling experience with a time & materials bidder. If not, buyer beware.
Cost Plus
Contractors that use a cost plus system charge a flat fee to take on any job. They charge the actual cost of materials and labor, then add a flat fee on top as profit.
Pros:
You’re paying for the actual cost of labor and materials and a fixed cost for your contractor.
Change orders don’t increase the markup - you’ll still pay the same flat fee if the scope of work changes.
Can be a good fit for quick-start projects without incentivizing the contractor to drive up costs.
Cons:
The fee to take on a job is often cost prohibitive for projects like home remodels.
The amount of labor and materials can still increase as the job goes on.
There can be disagreements between the builder and buyer about what the actual cost of construction is.
As with time and materials bids, costs can spiral out of control.
The contractor has less incentive to be efficient as all of their costs are passed on to the homeowner. In some cases, bonuses are written into the contract if the builder stays under budget or decreases costs, which eliminates savings the owner would realize.
Materials and labor costs can still change as the job goes on, so you still may end up paying more than you expected for this type of bid. Because of this, cost plus bids come with a lot of added risk to you
Cost plus contracts work well in situations where the scope of work is unclear, or a lot of flexibility is needed during the project. With most remodels and home construction projects this isn’t the case. Your builder should do work up front to create a clearly defined scope of work.
Fixed Bid Pricing
With fixed bid pricing, your remodeler will plan out and design the entire remodel before giving you a single price for the project. You’ll get a defined scope of work showing exactly what is and is not included in the remodel. Unless the scope of work is changed, the price will stay the same for the entire project. This removes a lot of uncertainty for both the homeowner and the builder, and sets up clear expectations for everyone involved.
Pros:
Gives you certainty on price, materials, and what the project will look like.
You know what the completed project is going to cost before you agree to start work.
You work with your remodeler to choose materials, so you know exactly what quality of materials will be used.
Fixed bid remodelers must be more organized by definition, which typically translates to better outcomes for a homeowner.
If your project takes longer or costs more than expected, your contract protects you from paying more.
Expectations are set upfront for both the contractor and the homeowner.
Cons:
Fixed bid pricing often takes dozens of hours to prepare. Most contractors will charge for this process. You may be able to get a ballpark price from your contractor before starting the design process.
There can be “sticker shock” at seeing what the completed remodel will really cost, especially if compared to under-quoted “bids” from companies.
Most contractors will not consider using a fixed bid pricing system for remodels if it is not already their preferred system of pricing.
So, which type of bid should I use?
When you’re considering what company to work with, the pricing methods they use can have a big impact on your experience and the build quality of your remodel. Make sure that you understand the differences and potential upsides of each process before you decide on who to work with.
Keep in mind that time and materials and cost plus quotes are often written to get the job and figure out the cost as they go, while fixed bid is set up to provide certainty up front for both the builder and the homeowner. Fixed bid requires more planning time up front, so it is often inappropriate for jobs that require a quick turnaround. If you want more organization, planning, communication, and certainty of outcome, fixed-bid is the model for you.
Ealy Construction’s Fixed Bid Process
We’ve used all of these processes throughout the years, and have seen the pros and cons of each. Because we’re focused on providing the best experience possible for homeowners, we use fixed bid pricing for all of our remodels.
Some of our favorite things about using fixed bid pricing as a design-build remodeler:
It lets us collaborate with you on the design process. We make big decisions like materials, appliances, and design choices together before we ever swing a hammer.
We can “value engineer” your project, showing you alternative materials or building processes that apply your investment efficiently and add additional value to your remodel.
It provides certainty and security for both you and us. We are able to set exacting standards for ourselves about the work we create and remove a lot of the risk that you would take with other types of “bids”.
You get to know up front what to expect with your remodel, and we can set clear expectations for each other. Remodeling comes with a lot of uncertainty and we want to remove as much of that as possible for everyone’s benefit.
Several of our clients have gone with time & materials bids after seeing how much “lower” they were than our initial quote for work. After the other contractors went over budget, the final cost of their project ended up being higher than the fixed-cost of our bid. That led to a difference of thousands or tens of thousands (and even hundreds of thousands of dollars in one case that we know about) in overages when potential clients thought they were saving money with someone else’s “lower” quote.
This is a pretty common scenario in our area, so we wrote a guide to help you compare bids accurately and make an informed decision about what’s best for you. If you’re considering different contractors for your remodeling project, use our guide make sure that you’re comparing bids effectively.
Make sure you’re ready to remodel.
Download our free “Guide to Hiring a Remodeler” for a complete walk through on what to look for when hiring a contractor and what to expect during a remodel.