My wife and I are planning a home addition, and I'm curious about how contractors work when it comes to pricing. Since they typically receive a percentage of the job cost, do they really have any incentive to keep expenses low? I want to find ways for us to work together on the budget with our contractor before we start.
4 Answers
Absolutely! Contractors generally need to be competitive in their pricing to win jobs, so if they overbid, they may lose out. Plus, they often rely on word-of-mouth referrals to get business, which is a big incentive to stay affordable. It’s in their best interest to keep costs manageable.
You're right to be proactive about the budget! If a contractor quotes a high price, they risk losing the contract. It really comes down to how contracts are structured. For instance, a fixed-price contract encourages contractors to bid low, whereas a cost-plus contract doesn’t necessarily motivate them to minimize costs. Just remember to clarify what happens if costs increase after the initial bid; some contractors might try to raise the price mid-project, so it's good to set those boundaries early.
One effective approach to keeping your contractor on budget is to agree on a fixed price upfront. However, if they’re willing to work on a 'Not to Exceed' basis, be prepared for that to be at least 20% higher than the original estimate, as that puts the risk on them for any unexpected costs. Another option is to incentivize them with a bonus for completing the project on time and within budget. Just keep an eye on their progress, as financial incentives can sometimes lead to shortcuts. Also, don’t forget to thoroughly vet their references to get a sense of their past performance regarding budget management.
Good question! All businesses are profit-driven. The best way to ensure you're getting fair pricing is to obtain multiple bids. Keep in mind that just because a contractor charges more, it doesn’t guarantee better quality. If you can, hire someone based on personal recommendations or look out for reliable online reviews—but be cautious, as some of those can be misleading.
Thanks for the advice! Just to clarify, if I get an initial bid, does that mean they have to stick to that number, or can they increase it if prices go up later?