Contracts & Change Orders
There are two basic contexts in which home construction contracts are established: Fixed Price, or Cost plus Percentage; and each have their advantages.
The "fixed price" contract is an excellent option when the details have been clearly specified, and no substantial changes are anticipated. This contract style will reference the plans and specifications, cost and payment terms and schedule, completion time, warranty and various other conditions.
Under this type of contract, changes made later to the scope of work are executed under the authority of a "change order." Change orders describe the proposed change, the cost and the time adjustments, if any, necessary. Builder markup on change orders will follow the contract terms, subject to the same percentage calculated originally.
Change orders are an effective way to handle minor variations during the construction of projects which typically don’t anticipate many changes. Then, if changes are made or proposed, the project may be delayed while changes are investigated and cost/impacts calculated, since related work cannot proceed until the change is approved by both homeowner and builder.
The "cost plus percentage" contract serves well in situations where the owner wishes to have more flexibility and involvement in the project. This arrangement reduces the need for formalized change orders and the delays that accompany working out exact costs prior to executing proposed changes.
Working within the terms of a cost plus percentage contract allows the homeowner to reduce overhead by sharing the benefits and risks with the builder. By comparison, builders working under a fixed price contract will, by necessity, include margins to cover potential punch-out and service costs, as well as minor unforeseen changes. By only incurring cost on the work actually executed, the builder is able to work safely under a reduced margin. The owner, in turn, only pays for work actually required and not work that must be automatically written into the project, such as the potential for repeated trips after move-in to service or adjust components of the home.
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