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April 17, 2018  |  by Jake Kostelyk

Contract Talk: Cost Plus vs Fixed Price (Hint: there’s a massive difference)

If you are considering a renovation or home building project, you will face a choice between two very different contract structures employed by contactors and design/build firms. 

The first contract structure is commonly known as “Cost-Plus”. As suggested by the name, these contracts are structured to charge you the cost, plus an agreed upon markup percentage. The markup is applied to every trade, building material and finishing product/material used in the performance of the work. Additionally, the contract will also outline separate hourly rates for work performed by the contractors carpenters, site leads and project managers. In this model, the contractor is assured of a profit. However, you have no contractually specified price because the “cost” in the “cost plus” equation is not set. Indeed, the final cost of the project is revealed only a few months after project completion has passed, and the contractor has finally received all trade and supplier invoices. You are billed on a periodic basis, typically monthly, with a list of incurred costs and labour hours consumed with the markup applied. For example, if the drywall invoice that shows up is $20,000 and the contract you signed is a “Cost-Plus 24%”, you will pay $24,800 plus applicable taxes. Pretty straight forward, right? 

Peering under the hood of this commitment, however, reveals some concerns that are the basis for so many HGTV shows. Using the drywall example, what happens if the contractor’s preliminary budget estimate of $250,000 for the entire project assumed $15,000 in drywall charges, but the invoice comes in at $20,000? You are still charged $24,800 based on the terms of the contract ($20,000 plus the 24% markup). In addition, the contractor has enjoyed an additional $1,200 in profit, due to the additional markup. Not only do you have no firm commitment to the total project cost, the contractor has a perverse incentive to allow costs to escalate. The contractor shoulders none of the risk and pockets all of the upside.

This is the root cause of many of the challenges that confront homeowners working with cost-plus contractors; artificially lowball estimates, poor disclosure of construction risks, vague definition of the work, misalignment between the designer and contractor, deferment of key decisions until well into construction, cost placeholders for unselected products that seem inadequate and limiting, multiple change orders and, ultimately, a total project cost that is significantly higher than what was expected and discussed.

Simply put, there is no contractually defined project cost and certainly no accountability to achieve any numbers “discussed” during sales or design. The project will “cost what it costs” while the contractors profit is assured by the only binding term of the contract; the markup. You shoulder the entire risk without any contractual protection. That is a huge leap of faith. 

The alternative contract structure is “Fixed Price”. (full disclosure; this is the one we firmly endorse as serving your best interests). Once again, the name says it all; the exact price of the project is contractually defined BEFORE construction commences. Rather than a contract only outlining the profit percentages, and hourly rates, it simply agrees to the total amount to be paid. The work to be performed for that fixed price is exhaustively defined in supporting drawings, written scope and written specifications. If there are unresolved decisions or risks, those too are documented along how these undisclosed risks will be reconciled.

You may be wondering how this number may be known before work is performed and trade, material invoices start to flow. The honest answer is -  it’s not easy. It demands a great deal of experience and a design journey that includes thorough assessment and disclosure of risks, complete and accurate scope and specifications right down to the colours of grout, and advance involvement from all trades and suppliers. Why? Because a 100% fixed price contract requires a thoroughly completed and documented design and planning phase.  

This is the “heavy lifting” side of design work generally absent from cost-plus experiences. A detailed, completed design provides you with clear targets and reliable information to inform decisions as design progresses. Fixed price contractors still seek to make a profit, and lets assume that the markup is exactly the same percentage as the cost-plus contractor. The fixed-price contractor shoulders the full weight of cost overages or estimating errors, which is where it should be, as they’re the one’s who are being hired as the trusted professional for your renovation or home building project.  If the invoice submitted by the drywall trade exceeds budget, the variance erodes the contractors return. Due to this level of accountability, it’s in the contractor’s best interest to accurately scope the work, brief the trade and secure a firm written quote. This applies across the board; electrical, plumbing, framing etc. Better planning leads to lower risk.

The entire experience with a fixed price contractor differs markedly from cost-plus; there is a shared incentive to thoroughly design and plan each aspect of the project ahead of time, as the result will be a project completed on time, and on budget. While a “higher than expected” drywall invoice will profit a cost-plus contractor, it will hurt the Fixed-Price contractor. For this reason, the Fixed-Price Contractor wants to ensure design is thoroughly completed before construction starts to ensure they won’t be absorbing “surprise” costs. The Fixed-price contractor is motivated to figure out site access and drywall delivery details, as well as debris removal instructions, heating and water requirements, and even how many days on site will be required, as these will all affect the the price from the drywall contractor. 

At first glance, the Cost-Plus and Fixed Price contracts may appear quite similar. The absence of a firm cost commitment in Cost-Plus, however changes every facet of your experience from the first meeting with the contractor to the final invoice after construction completion. There is no escaping the fact that Fixed Price demands more work up front, but that hard work will be rewarded with a project completed on-time, and on budget. Your home is a major investment, and the hub of your daily life. We believe that the combination of a thorough and collaborative design phase resulting in a 100% Fixed Price and Schedule Commitment provides the peace and mind that's needed in order to move forward with a renovation or new home building project. 

Have any questions about your project, or how our model works, email us at info@kenorah.com or call 604.371.1455!

May 17, 2017  |  by Leslie Teague and Vanessa Palframan

Kitchens 101 - Planning Your Space (Part One)

Planning on renovating your kitchen, or building a new one and don't know where to start? We've gleaned some great information from our Design Leads, Leslie Teague and Vanessa Palframan on everything from kitchen layout to appliance suggestions, fixtures, trends and more! We have divided this post into three parts (Planning Your Space, Kitchen Style and Kitchen Appliances). Read on for some great information on planning and designing your kitchen to make it a functional space that fits your needs!

At Kenorah, as we work with our clients to plan their new kitchen space, whether it's a renovation or a brand new kitchen, we start with the question of: "How do you use your kitchen?". This is truly the key to planning a space that will be most suitable for you and how you intend to use your kitchen. Do you cook a lot, or are you looking for more of a display kitchen? Do you entertain regularly? Do you cook flavorful/spicy cuisine that might benefit from a spice/wok kitchen? What stage of life are you in? (ie young children, teenagers, multi-generational living?). We will also ask you about your style and discuss your long term decisions for your space. Are you looking for trendy and modern or would you prefer to create a space that is more classic and has some staying power?

All of these factors will play into the design of your kitchen, appliance choices, storage, and more and we work closely with our clients to help them the create the best space for their requirements.

Kitchen Layout:

The next step is going to be looking at the space you have and how to use that efficiently and effectively. Obviously there will be more choices if you're building a new house rather than renovating. However, even with renovating there are often more choices than you think! If you're gutting your kitchen, moving walls or windows and changing plumbing locations can open up a lot of options when it comes to a kitchen renovation. Sometimes your space will dictate your layout; perhaps you will need to stay with a galley kitchen, or the island you're dreaming about might need to be a peninsula instead, but we do our best to help you achieve your dream kitchen.

We are often asked about the 'kitchen triangle', however we like to think more in terms of 'kitchen zones'. We prefer to look at your space in terms of how you are going to be using it and look to incorporate various zones into your kitchen which could include: a prep zone, a cooking zone. a beverage/entertaining zone and/or a multi-purpose zone (ie a study/work space), etc. We do consider the kitchen triangle in the planning process, however, it's often not the forefront of the plan, but rather a consideration throughout the process for efficiency.

Kitchen Storage:

A key consideration in planning your kitchen is storage. While open shelving is all the rage, do you have enough cabinet space to have all your not-so-pretty kitchen necessities out of sight? 

- Pantries: A walk-in pantry or a large pantry cupboard is a great way to create storage for small appliances, serving dishes, dry goods, etc and is often seen as a necessity for families! Walk-in pantries can also be a great spot for a second fridge or dishwasher if your space allows.

- Appliance garages were popular a few years ago, but they aren't always as efficient as one would hope, as they tend to take up a fair bit of counter space. If you choose one of these, consider how the doors will open and will it be easily accessible and not block key areas of your kitchen?

- Garbage and recycling pull-outs are a little touch that add a lot convenience!

- Spice drawers seem like a good idea, but aren't always a flexible fit for different types and sizes of spice containers. It helps your kitchen designer to know what type(s) of spice containers you typically use so we can find the right solution that will fit your spices.


Image Source

We will be back with Part Two - Kitchen Style, next week. Stay tuned!

April 12, 2017  |  by Itel Chung

Building Codes - The Kenorah Process

Thank you to Itel Chung, our in-house Architectural Designer for sharing more about building codes and how Kenorah's many years of experience, industry know-how and knowledgable staff help you avoid unnecessary surprises during your building or renovation project. Our goal is always to provide you with all the necessary information to make the right decisions and to have a project that is as stress-free as possible!

In the building and renovation industry, every project is different. The one constant is that they all follow a set of codes. In BC there are 2 governing Building Codes: the BC Building Code (BCBC) and the Vancouver Building Bylaw (VBBL), which is obviously specific to the city of Vancouver. In fact, Vancouver is the ONLY city in Canada which has its own building code that supercedes the Provincial/National codes. 

At the beginning of a project, the first step we at Kenorah do is analyze any risks or restrictions that may be associated with the job. The initial review requires a thorough bylaw analysis which covers the Municipalities regulations such as the building’s setbacks and height restrictions, the amount of allowable floor space, potential heritage restrictions, easements, etc . Additionally, we visit the site to see in person what the condition of the home is.

Once on site, we do a complete walk through with our trades of every room, crawlspace and even the attic spaces! This lets us identify any potential code issues early on. Some standard things that we look for during these walk-throughs are stair compliance, railings and guardrail height, attic insulation, etc. Most municipalities will enforce a mandatory upgrade if something isn’t to code and is a potential safety hazard. These mandatory upgrades can be quite an expensive surprise if it is not identified early on.

After the site visit, the client is notified of any non-compliant items that would be an issue as well as what it would take to bring it up to code along with estimated costs and time-frames involved to rectify the issue. 

For example: If the stairs of a house being renovated aren’t up to code, and your builder is unaware of this prior to submitting for permit and begins construction, an inspector could come on site and force the stairs to be redone. This is a common oversight, even though most municipalities require the path of egress to be up to code. This unplanned for event could cost the homeowner anywhere from $10,000-30,000. These are not only costly oversights, but it can have a big impact on project timelines as well.

Since the BCBC and VBBL are a moving target with the Building industry getting more and more energy efficient, it is crucial for our team and partners to be up to date on the current standards. Kenorah’s model is to identify any issues as early on as possible. This is one of the most important parts in our process and sets the groundwork for a successful project.

With Kenorah's Integrated Design/Build process, we explore existing conditions, research building codes, and bring our trades in to provide valuable insight so that when construction begins, we are able to offer our industry leading 100% Fixed Price and Schedule Commitment. 

Learn more about the Design + Build process at Kenorah: Kenorah Process

Categories: The Kenorah Process