Fixed price contract on a gut, or cost plus with a bench you trust

I don't flip, but I read this the way I'd read a management agreement, and the thing that jumped out is that cost plus makes you the manager. If the appeal of a strategy for you is that someone else runs it, cost plus takes that away and doesn't refund anything.

I've spent longer than I should comparing these on paper without signing either.

The GMP failure mode, as far as I can tell from talking to two GCs who wouldn't offer one: the max only holds against the scope as drawn. Every discovery becomes a scope change, and a scope change resets the max. So on a gut, where discoveries are the job, the guarantee protects you against the part of the project you already understood. Which is the part you didn't need protecting on.

The other thing is that a real GMP requires drawings detailed enough to price properly, and getting to that level of documentation on a distressed shell means paying for investigation before you own the house. Some people do exploratory demolition during the inspection period. Most sellers of distressed property won't allow it.

windlass, that's clearer than anything I've read on this. So a guaranteed max is guaranteed against drawings, and a gut is defined by not having good drawings. I've been trying to understand why the paper side of construction looks so different from the paper side of notes and that's basically the answer.

Six months of looking and no deals, so take the direction of this rather than the specifics.

Every experienced operator I've asked about this has answered a different question than the one I asked. I ask about contract structure and they tell me about the contractor. Their view is that fixed price with a GC you don't know is a fight you will lose, and cost plus with a GC you've done four jobs with is the cheapest way to build. The structure is downstream of whether you have a bench.

Which is unhelpful when you don't have a bench yet. The suggestion I got twice was to do a smaller scope first with someone you want to work with long term, specifically so the first gut isn't also the first time you've worked with them.

I want to put numbers on the risk premium because everyone talks about it and nobody sizes it.

I've looked at bid sets on eleven heavy rehabs as a capital partner. On the projects where we got both a fixed price and a cost plus proposal from comparable GCs, the fixed price sat 11 to 19 percent above the cost plus estimate at the same scope. On the six cost plus jobs, final documented cost plus fee came in above the original estimate every time, average about 14 percent over. So the ranges overlap almost completely, which tells me the structure isn't where the money is decided.

What did correlate was change order volume. Two jobs generated more than 20 change orders each and both were fixed price with a GC the sponsor hadn't used before. Those were also the two that ran longest. I can't prove causation from six and five, but the pattern matches what pike is describing.

quill, the thing I'd want before signing either is the payment schedule and the lien waiver process, since who has money at what stage decides how much argument you can actually afford to have. Mechanic's lien rules differ by state and the timing on waivers is state-specific, so that part needs your attorney rather than this room.