Many building companies are now offering open book/cost plus contracts due to the huge rise in cost of construction materials. There have been many rumors and truths that have been floating around with both builders and consumers. Professionals in the industry want to share what is true so that the consumer can make the best decision.
One of the big untruths about open book/cost plus contracts is that they are better overall for consumers. This has caused a jump in the demand for open book/cost plus contracts but is it for the best? Consumers assume that a builder will want to negotiate the best rate for labor and materials but this is not the case. The more a builder has to pay for labor and materials, the more money the builder will make for themselves. Builders have a ton on their plate, and investing a lot of time to negotiate the best possible pricing is not on the top of the list.
That still doesn’t mean that they are the best way to go for builders. Usually, a new builder who is just starting off will use an open book/cost plus contract so they will not have as many risks involved. When they become more established they usually switch over to fixed price contracts because it is not an easy task to talk a consumer into the 33.3% standard markup that is shown on an open book/cost plus contract.
According to a survey done by CoConstruct the average profit margin on a fixed contract was 28% more than an open book/cost plus contract. This was also supported by the 2023 State of the Residential Construction Industry Report. This report stated that data from over 1,000 countries backed up that data by revealing that 30.8% of builders using fixed-price contracts were able to add over 25% gross markup to their projects while only 17.9% of cost-plus builders enjoyed the same margins.
So when it comes to a construction contract, a fixed price contract will most likely be the cheaper way to go for a consumer. For experienced builders, this means more profit in the long run. If you are a new builder, cost plus might be the way to go until you are confident with your pricing on your work.
