When you are looking for a contractor, one of the toughest decisions you have to make involves how you want the cost of the job to be determined. Three methods most often suggested are: having the contractor manage all aspects of the work, conferring with you about estimated costs and fees; paying for materials and hours of labour at a certain rate; or agreeing to a fixed price.
A lot of contractors will disagree with me, but I think the only contract you should ever sign is one with a fixed price.
With the "project management" method, the pressure is taken off you. The contractor gets quotes from subtrades and suppliers, presents them to you for a decision (with his help), then does the hiring and oversees the job. You get a costing for all the work required, but it's an estimate, not a guaranteed figure. You might get a guarantee for a range -- say 10 per cent above the estimate -- but that kind of guarantee is easy to get around when changes are made.
You also are quoted a "management price" to be paid to the contractor for running the job. It's calculated on either the expected length of the project or the materials cost. It's usually a fixed price, which makes it looks safe, but don't be fooled. Since the contractor has so much control over the costs, he can pretty well get paid what he thinks he can get away with.
Most important with this kind of contract, there's no motivation for the project manager to control costs. If there are over-runs, he loses nothing. In fact, he may gain from it because there is usually a provision for an additional "management charge" if the contract changes in scope or cost -- up or down.
Contractors like project management agreements because they eliminate financial risk and give them -- not you -- lots of flexibility when things don't go quite as expected. And they get to pass on any additional costs to you.
For smaller jobs, many contractors like to have a "time and materials" contract, where you agree to pay for materials and hours of labour at a certain rate. The contractor presents you with the invoices for materials and the time cards for workers in a set pay period -- say, every two weeks. You write a cheque for it all, plus a surcharge for overhead and profit, which has been outlined in the contract.
Contractors will tell you that this kind of agreement is best when there are lots of changes to be made during construction. But the question is, why would you commit to a renovation that is so poorly planned that such a contract is necessary? What you're doing is opening up your bank account to your contractor.
The fixed-price contract says: "This is the work to be done, and this is the price you will pay." Period. It clearly lays out the scope of the work in detail. And the price doesn't change unless that scope changes.
With such a contract, you know ahead of time what you are paying for, and will have the power and knowledge to make sure you get what you are paying for. These contracts still allow for flexibility -- you can make changes and negotiate a new fixed price during the job.
It forces you and your contractor to make all the important decisions before construction begins, and demands that you do your homework and learn everything you can before you hand over your hard-earned money. It puts the financial risk squarely where it belongs -- in the hands of the contractor. And it "fixes" the contractor's -- and your -- focus squarely on the job, and its successful completion.
Mike Holmes is the host of Holmes on Homes on HGTV.