The Cost Plus Ethos

I came across a reel on Instagram the other day for a popular contractor “business educator” and one of their clips really bothered me:

“When I sign a contract with a customer, I am now in the risk management business.”

Now this particular contractor came up in the commercial high-rise industry, and in that world it is all about risk management and protecting margins. It’s businesses working for businesses on repeatable floors of big buildings.

I was really struck by how little I personally relate to that mantra, because I am not in the risk management business.

I have to pause for just a second to say that risk management is a part of my business, of course it is, but it is a small part. It is certainly not a part of our ethos and philosophy; it is certainly not part of our mission statement; it is not the why in why we are in business. It is as important to me as having payroll go out on time. it needs to be done, and it is done, but we don’t center our lives around it.

The risks we manage are those that will hurt our client, our vendors, our trades, our employees, etc. At a company level, we manage the risk of lost income, but at a project level, we don’t want that to enter into our mindset.

In the world of custom remodeling, we can’t be constantly worrying about margins, trying to shave a dollar here or there, so that our business doesn’t sacrifice one inch of margin to the client. That is so antithetical to what we are trying to do.

We are, rather, in the budget control business. We build our budget through our preconstruction process and then track and manage it during construction. Sometimes this involves difficult conversations; sometimes it involves revealing that we missed a scope item, or underestimated something, but all of this happens in the open, with a transparent view of our margins and costs.

Yes, we need to make money. Period. Yes, the margins need to be good enough to support the business and incentivize all involved, but holding in mind the mantra of “managing risk to our bottom line” is not conducive to an elegant final product, at least in my view. No doubt some will disagree, and I know many fine builders personally who do not run Cost Plus businesses.

In the end the Cost Plus versus Fixed comes down to how you aim to protect the profitably of the business. Do you protect it with a larger fixed price, or do you do it through a transparent cost plus contract? All things being equal, the end result of both approaches should be the same: both have change orders, additions to the scope, unknown defects, etc. Both get modified throughout the project. In cost plus, the budget changes, in fixed price the contract itself changes. For me, I prefer the flexibility of the cost plus and the tone it sets for building trust with the clients. But then again, it’s all we’ve ever done.