have a variety of contract payment options when making home improvements.� The
key is choosing the right option for your circumstances � and your contractor.
Some 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 contractor.
You may want to consider taking out a home equity loan to pay for your remodeling. This can provide you with additional tax advantages.
are the basic types of payment plans you can select:
The Fixed Fee Contract
fixed fee or flat-rate contract is the most used payment method for most 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 great for contractors who know how to estimate.
type of fee is based on a detailed contract that outlines every piece of work
that needs to be completed and every material, fixture or appliance that will
be used. The flat rate payment plan is just that - a flat rate based on the detailed
contract. You only pay the flat fee listed 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 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.�� 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
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- he is guaranteed a profit on the job. The advantage
to you 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
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
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.
Source for this article: Smart