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Remodeling Contract Should Protect the Homeowner

All Remodeling Contracts Are Not the Same

by Gary R. Crum

Getting Started

remodeling contract

-The first step to a successful home remodeling project is setting a budget which will include how you are going to finance the project.

-The next step is to get three bids from reputable contractors. The key word here is reputable and you will want to check references and maybe even visit some of the contractors finished projects.

- The third step is to select a contractor and agree on a contract that will include details of how the contractor will be paid. It is your job to protect your interests in such a project.

Making payments to a remodeling contractor.

You never want to give a contractor the full amount of the contract in advance since the incentive to complete the project would be greatly reduced.

Several forms of remodeling contracts are available for homeowners that will describe how to pay the remodeling contractor for the home home improvements.



Some remodeling contractors will only offer one type of payment plan. It is up to you to decide whether to accept that payment plan or find another remodeling contractor.

Home Equity Loan

You may want to consider taking out a Home Equity Loan to pay for your remodeling project. A home equity loan can can provide you with additional tax advantages depending on your tax situation.

Types of Remodeling Contracts

Fixed Cost Remodeling Contract

The fixed cost or flat-rate remodeling contract is the most common method used for remodeling projects. It is the most popular because it works great for homeowners who are new to remodeling or who need to know exactly how much it is going to cost before starting the project. It also works well for contractors who know how to accurate estimate construction costs.

Devil is in the Details

A detailed remodeling contract outlines every piece of work that needs to be completed and all materials, fixtures or appliances that will be included. The flat rate payment plan is just that, it is a flat rate based on the detailed remodeling contract. You only pay the amount in the contract — no more, no less.

The disadvantage of this type of contract lies in the estimate — just how accurate is it? If the contractor over-estimated the costs in the contract, you will pay for a larger profit margin. If he under-estimated the contract, he will lose money on the job and the quality on the job may be in question. Most reputable contractors will take the underestimate on the chin without affecting quality, but every contractor can't afford to take loses.

The advantage of this type of payment plan is the ability to plan ahead. You know how much to expect and can budget accordingly.



Cost Plus Contract

This payment plan, also called the time and materials plan, is fairly straightforward. You pay for all materials and products, an hourly rate for your contractor’s time and a mark-up of 15 to 35 percent of the contractor’s overhead and profit. Most contractors who use this plan will give a rough estimate for the overall job before it begins so you can still plan a budget.

This type of payment plan is great for the contractor since he is guaranteed a profit on the job. The advantage to the homeowner is that the level of quality is likely to be quite high since your contractor can focus on the work and not be so worried about the profit margin.

-The disadvantage of this payment plan is that there are really no incentives for the contractor to keep costs down.

If this type of payment plan scares you, you may want to use a hybrid plan. Here are two popular hybrids that offer advantages while decreasing the disadvantages of the cost-plus.

Capped Cost-Plus Contract

This payment plan works the same way as the cost-plus plan but adds in a ceiling for expenses. If the total project costs are under the cap, you get to keep the savings. If the total is above the cap, your contractor is responsible for paying the excess amount. This helps provide an incentive to the contractor for keeping costs down some.

Capped Cost-Plus with a Split Contract

In this plan, you split the difference between actual costs and the cap with your contractor. The split could be 35-65 or 50-50 depending on your contract. The advantage of this payment plan is that it provides money as an incentive for high quality and reasonable costs.

Some contractors are wary of this type of plan because they feel it negatively impacts the relationship. Others are open to trying it. The split method can be a little unnerving and stressful, so it is only for those who can handle a little suspense.

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