Renovations are an excellent way to add value to your home and improve your lifestyle. When researching and preparing to renovate your home, you will discover two different pricing methods from design builders and contractors: fixed pricing and variable pricing. While there are both advantages and drawbacks to both types of pricing, it’s important to know the difference, especially so that you’re able to stay within your budget and avoid unexpected costs which place you beyond your means.
Fixed pricing, when it comes to home renovations, generally means “lump sum” within a contract. This type of bid guarantees that a specific amount of work will be accomplished for a specific price, unless, of course, work is added, subtracted, or changed.
Advantages of this type of pricing method include:
- Clear and accurate total price for the project. (Surprises and unexpected expenses due to small changes almost always happen in home renovation projects, but a fixed price contract should remain relatively close to an estimated price without any option changes from the design-builder).
- Timeline incentives. In this type of work, it is to the contractor’s advantage to get the work done in a timely manner so to free up labor to move on to the next project.
- Easy bid comparisons. If you’re comparing apples to apples with a fixed price, it’s much easier to compare multiple bids before deciding on a contractor to complete the job.
- Easier lending. Banks are typically more likely to lend money for a reno project based on a fixed pricing contract.
Variable pricing, on the other hand, means that the design-builder charges for the work completed using a margin, which can vary between 10%-15% for labor on top of the cost of materials. When projecting the overall cost for a project priced in this manner, the contractor may provide an estimate up front to serve as a guideline, but the bottom line will depend on the market cost for materials and may require quite a bit of re-bargaining if any sort of changes are made to your design and construction plans.
That said, there are quite a few advantages to the variable pricing method:
- Fewer consultant costs and delays. Because the pricing is based on the current market, there is no need to make as many decisions regarding the details before you start. Things can begin a little faster and pricing is more “fluid.” Calculating the overall cost can be a little easier in this method as well. Simply put, the cost equates to materials plus margin. That’s it.
- Less cost overall. Contractors using the fixed pricing method often include a margin in the lump sum contract anyway, so the variable or “cost plus” method option may provide a little bit more transparency about these margins.
- If for some reason the builder is unable to complete the project, you’ve only paid for the work completed and can more easily switch over to a different contractor at any point in the job.
While both methods can be advantageous to the home owner, based on your personality, you may be able to see more disadvantages in one method over the other. If you’re more comfortable knowing up front what your costs are going to be, perhaps a fixed pricing contract is for you. However, if you’re a little more fickle and know your preferences may change over the course of the project, perhaps you’ll opt for a design builder who works with variable pricing. Even better, some contractors now days are creating hybrid contracts, which are a mix of both methods.