Episode 79: Fixed Price Vs Cost Plus With Russ, Sky & Andy

Professional Builders Secrets brings you an exclusive episode with Co-founders of the Association of Professional Builders Russ Stephens and Sky Stephens, along with APB’s Head Coach, Andy Skarda. Throughout this episode, the trio delve into the key differences between fixed price and cost plus contracts, the pros and cons of each option, and how builders can go about making the switch.

 

Inside episode 79 you will discover

• The difference between fixed price and cost plus, and which is better for you
• Potential downsides of each contract type
• The impact of the past few years on builders' pricing strategies and how it may have affected their decisions
• Why so many builders are struggling with pricing
• How you can switch strategies
• And much, much more.

 

Listen to the full episode to uncover exactly how switching to fixed price contracts can help to set your building company up for success.

 

Russ Stephens - Co-founder

Russ Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Russ is a data analysis expert who has introduced data-driven decision making to the residential construction industry. Russ is also a proud member of the Forbes Business Development Council.

Connect with Russ

 

Sky Stephens - Co-founder

Sky Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Sky is a proud member of The National Association of Women in Construction and she was also recognised as one of 2021’s Top 100 Women. 

Connect with Sky

 

Andy Skarda - Head Coach 

Andy Skarda has owned and led businesses in South Africa, the United States, South-East Asia, and for the last decade, Australia. With 30+ years of business experience, Andy heads up the coaching team at the Association of Professional Builders (APB), helping business owners in the building industry identify and implement the skills and systems they need to be successful, without needing to go back to school or more importantly, without going bust.

Connect with Andy

 

Timeline

2:01 The difference between fixed price and cost plus

6:59 The downside of fixed price and cost plus

17:39 Builders who are adamant about using cost plus contracts 

25:53 Builders we've seen transition from cost plus to fixed price

28:26 Can you offer both options to a client?

29:12 Can fixed price contracts be dangerous in the long term?

 

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Andy Skarda:

If the client only has a budget of $500,000, I don't care what sort of contract you've got. When you go over $500,000, that guy stops paying. He's got no money. Guess what? You've committed to the supplier or the subcontractor; your name is attached to that cost.

Sky Stephens:

Clients get so hyper-focused on your margin, but if you have a contract that just has one price and includes everything, that's a lot simpler. “Here's the payment schedule.”

Russ Stephens:

Cost plus contracts do tend to be favoured by builders starting out because, generally, they're a bit nervous.

Andy Skarda:

The truth is the only way that you can remove the risk, you as the builder do everything in your power to make that contract land within that target budget, which is a very complicated way of running a fixed price contract.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales processes to financials, operations and marketing. 

Bosco Anthony:

Joining us today are Sky Stephens, Co-founder of APB. It’s always great to have you join us, Sky.

Sky Stephens:

Hey Bosco. How are you?

Bosco Anthony:

I'm doing well. Russ Stephens, Co-founder of APB as well. Welcome, Russ.

Russ Stephens:

Hey, Bosco. You're looking good today.

Bosco Anthony:

Thank you, sir. And Andy Skarda, Head Coach for APB. I look forward to hearing you share your insights today with us, and your analogies, Andy.

Andy Skarda:

I’ll do my best, as usual.

Bosco Anthony:

Well, I’m really excited to talk about today’s topic around fixed price and cost plus contracts. With these two types of building contracts, fixed price versus cost plus, what's the difference?

Russ Stephens:

A fixed price contract is exactly what it sounds like. It's a building contract that covers a set of plans and specifications that will be delivered within a fixed timeline for a pre-agreed price. Any changes to the design or the specifications will have to be agreed in writing by both the builder and the client and will be documented in the contract variation or a change order, dependent on where in the world you are.

Russ Stephens:

Now, a cost plus contract is an agreement where the builder will simply add a margin to the invoices they incur for the labour and materials, which they then charge to the client. Now, most of the time the builder will include their fixed costs or at least a charge for supervision in those costs as well that they then mark up. But this is where things can get a little murky on a cost plus contract. Those cost plus contracts do tend to be favoured by builders starting out because, generally, they're a bit nervous, and then as they become more experienced and confident, they tend to progress into the fixed price contracts.

Bosco Anthony:

Now, are you leaning towards one or the other? Which one is better?

Sky Stephens:

Let's get this out of the way. At APB, we only recommend our builders use fixed price building contracts. The reason for that, if we talk about the pros, and I'm sure we can get into the cons of both a little bit later, but if we talk about the pros, especially with fixed price building contracts, you as a builder are selling on value, not price. You get to package up everything that you're going to do and deliver under one cost, whereas, if you look at cost plus, you're constantly focused on price because you’re saying, "Well, here's the cost. Here's my margin and my markup that I'm adding on, and here's what you pay." 

Sky Stephens:

Clients get hyper-focused on the margin you are making, every little markup you are adding on. It doesn't matter what the original cost was. It's like they feel hard done by it, or it can be perceived that they're getting hard done by because you're making all this money, when in reality you're just trying to do the job. It always leads to a conversation about price, about money, you don’t want to get your margins squeezed.

Sky Stephens:

Ultimately, with fixed price building contracts, you can achieve much higher margins. Not only that though, as a building company, you can actually be a lot more productive and much more efficient when you use a fixed price contract. When you're doing this and you're producing that, you are producing a job schedule and a timeline as well. If you are presenting a fixed price to the clients, you are going to do a lot better in pricing, estimating and even scheduling that project before it starts because you want to make that margin. You don't want any mistake to bleed into the money that you are getting, so you're going to be a lot more on top of it, and ultimately because your schedules are a lot tighter, your estimating is a lot tighter and you are a lot more efficient as a building company.

Russ Stephens:

To back up what Sky is saying there as well, CoConstruct actually did an analysis of their data where they compared fixed price versus cost plus. They found that the fixed price projects had a 28% higher average margin than the cost plus projects. That really says it all.

Bosco Anthony:

Is it a case by case basis, or is there a preferred type of building contract for builders of a certain size?

Andy Skarda:

No, I think that Sky has touched on this already. We certainly don't suggest that people vacillate between the two. We'll probably get into the pros and cons of both in a second. I don't really want to get into that here, but the truth is, we doubt that you're going to get us – certainly Russ, Sky and me – to ever say to you that a cost plus contract generally is going to deliver better results. On paper, it sounds like it should.

Sky Stephens:

Well, I think it sounds easier. Do you know what I mean? I think it sounds easier.

Andy Skarda:

It sounds like the client is taking all the risk, but as I'm sure we'll get into in this discussion, what happens in the real world is the way they get executed turns them into a nightmare. I think that’s the nicest way to put this; it turns them into a nightmare, in most cases. We've heard very, very few real reports from builders that cost plus has actually worked for them.

Sky Stephens:

With leaving raving clients, raving fans. As the projects go longer, the clients are just paying more and more and more. It's one of those relationships where people think, "Thank God that's over. We're done."

Andy Skarda:

Yeah, yeah.

Bosco Anthony:

Let's dig a little deeper with the cons here. What is the downside to using a fixed price contract? Also, what is the downside using a cost plus contact?

Russ Stephens:

In terms of a fixed price, I think the risks have really been highlighted by the construction boom over the last two years. In particular, with construction inflation, when costs go up, the builder loses. They can mitigate the risk by inserting a cost escalation clause or a rise and fall clause into the contract. In the US, 66% of builders do exactly that. 

Russ Stephens:

But in Australia, for instance, only a third of builders are currently inserting that clause to protect themselves. There's probably a good reason why the numbers are a lot lower. In places like Victoria, they're actually illegal for contracts under $500,000, regardless of what you put in the contract. That does prevent builders from covering their downside. The big risk is if costs go up, or if you miss something in a fixed price contract, then you are potentially exposed and up for losing potentially a lot of money.

Russ Stephens:

Now, the risk regarding cost plus, I think the perception there is that the builder has covered off all the risk. This is probably why they are favoured by new builders. But the reality, as Andy just alluded to, is a little different because these builders have still got to get these costs paid. The client might be contractually bound, but that doesn't negate the arguments that take place. Andy is probably in a better position than all of us to talk about that firsthand, as to what he's seen happen. It can and does lead to a poor experience for the client as well.

Andy Skarda:

The thing that you've got to understand with these things is that with both, whether we talk fixed price or cost plus, whether the client admits it or not, the client has a budget. Even Warren Buffet has a budget for his building project. The reality is, cost plus sounds like it's unlimited at the top end, that whatever it costs is what the client can pay. 

Andy Skarda:

The problem for the builder is if the client only has a budget of $500,000, I don't care what sort of contract you've got, when you go over $500,000, that guy stops paying. He's got no money. Guess what? You've committed to the supplier or the subcontractor; your name is attached to that cost. It's just making sure that people understand we can name these things any way we like. Clients have a fixed ceiling over which they will not or cannot go, irrespective of what type of contract you give them.

Sky Stephens:

You raised a really good point as well because I think certainly our experience, hearing the number of builders who have come to us who have started using cost plus contracts, shows it's not a huge markup that they're adding. The margins that they're adding are a lot smaller because the clients can see it. I think there's this misconception that, "Oh, I don't need much. That's all the materials paid for. This is just a margin. It's all good. I've already got a project management fee in there, so my time's covered." It just doesn't work like that because you've got to think about the net profitability for your whole building company because you've got more expenses. You've got staff, you've got offices. 

Sky Stephens:

Even if you don't have offices, even if you don't have a whole lot of staff members, you have company expenses. You've got your website, you've got different marketing materials. That all adds up. Unless you're super conscious of it, you are just paying for that, at the end, out of the tiny little bit of margin that you did put on that project. Whereas, if you focus on fixed price building contracts and you combine it with our pricing for profit methodology, you're actually including all of that in that one price. Everything is included in that one price.

Sky Stephens:

Clients get overwhelmed. Building a home, in general, is very overwhelming for so many clients. You've got so many decisions to make, but if you have a contract that just has one price and includes everything, that's a lot simpler: “Here's the payment schedule.” It's not: "Here's new bids. Here's the markup. Here's what you need to pay, please. Please, please, please, please,” all the way throughout.

Bosco Anthony:

I have a question in regard to the clauses. You mentioned that you could potentially have a clause added, and in Australia, not many builders are actually putting this to paper. Should builders talk to a legal representative who specialises in this particular field when building these contracts out?

Russ Stephens:

Definitely. Contracts generally, can be a bit of a maze. When we speak to construction lawyers, in their experience, most builders have never read their own contracts. Sometimes they've even pieced them together from different stuff they've downloaded from the internet to bring a contract together. That just, quite simply, doesn't work. It's why a lot of builders end up falling foul of their very own contracts. A hundred percent, I would definitely recommend, when it comes to this stuff, that you speak to a construction lawyer. As much as I hate giving lawyers money, I think this is a good investment. Fix it once, get your contracts fixed up and get that clause professionally written because you don't want anyone being able to bypass it.

Andy Skarda:

There is a preconception, certainly in the Australian market, that some of the building association contracts cannot be changed. There's this misconception in builders’ minds that if they’re a master builder and they use a master builder's contract, they can't change a single word or clause in that contract. Ditto, HIA, et cetera. That is absolute horse manure. Every contract is negotiable and changeable between the parties. Exactly as Russ said, in a lot of cases, all that it's going to need is to have some of those clauses adjusted and maybe a clause or two added, and now you've got a contract that you can use for the next 10 years. It's well worth that investment.

Sky Stephens:

But then you know exactly what's in your contract, and you can communicate that clearly to your clients, you can over-communicate it. Everyone feels fine about it. It's not this sneaky little clause that you're putting in the background. It's communicated. You're explaining, "Well, the benefit is this. Here's why we do it." You get to explain it to both parties very clearly.

Russ Stephens:

Yeah, with these cost escalation clauses, there can be a bit of resistance by consumers because they have the perception, "Well, if I agree to that, that literally gives the builder the right to charge me whatever they want." Well, no, they still have to justify that it is a legitimate increase in the cost of materials. The way I present this to a client as well is that business is all about risk. 

Russ Stephens:

We know construction materials have risen 20% year on year for the last couple of years. Builders have got wise to that. If they don't have a cost escalation clause, they're going to have to insert 20 to 30% to cover off that risk. As a consumer, do you want to pay that 20 or 30%, or would you rather take the risk yourself with a cost escalation clause? I know in the current climate, I wouldn't expect increases to continue the way they have, but if I were exposing myself to a contract, I would definitely be pricing that in. I think it's in the consumer's best interest to go for a builder who has that clause in their contract.

Sky Stephens:

This is the thing that stops a lot of builders that we talk to in their tracks. They say, "Well, then that's not a fixed price contract anymore." It absolutely is. It's not a cost plus. It's still a fixed price building contract. You just have special terms, special conditions and special clauses in there. It's still fixed price. This is exactly what you were saying, Russ, this is how it's communicated. “This is your fixed price. If however, X, Y, Z were to happen, this is the contingency. This is what happens in that scenario.”

Bosco Anthony:

Do you think the last few years have impacted a builder's decision one way or the other?

Sky Stephens:

I would say definitely, if they weren't already sold 100% on the benefits of a fixed price contract to begin with. Any building company owners we've spoken to who were on the fence, if they were doing fixed price contracts and didn't have these special clauses in place and did get stung by them having to cop the bill and just take it on the chin, absolutely. I think it has influenced so many builders in this industry to revert and just go back to cost plus because it's that myth that it's easier. In fact, they think “It's better for my building company,” when it's just a myth. It's absolutely not better. We see it time and time again. But I do think what's happened over the last few years has been horrific for the construction industry in so many ways.

Sky Stephens:

There have been some good stories there, for sure, but it's been quite horrific. I think that has impacted a lot of builders’ confidence, to be honest, on how they can even go in and deliver a fixed price contract without the knowledge of inserting those special terms and special clauses and having a lawyer on their side to know that yes, this is fixed price, this is what's going to happen in a scenario where something goes up, but going in there with confidence. You're just reverting, going to what you think is easier, and it ultimately just leads you into a worse situation for your building company. It's harder to get ahead and change and have enough retained net profit to invest back into the building company and grow and grow safely and securely and everything that we talk about.

Andy Skarda:

Bosco, when you talk about impact, I can think of a significant number of our members who have eaten those increases over the last two years because they honour their word. I've had heated exchanges with clients where I really wanted them to go back and renegotiate the contracts and they've said, "No, I gave people my word; I'm sticking to my word." They've absorbed that and the client isn't even aware of it.

Sky Stephens:

Well, you tell me who does that in any other industry?

Andy Skarda:

Exactly. You always laugh at me because I draw the distinction between a professional builder and a builder. This is the difference. This is really when the rubber hits the road. Instead of trying to find sneaky ways of doing things, they sit back and they say, "No, that's the price that I agreed to. I need to box clever and come up with a way that the client is not affected." That word ‘impacted’ in your question is a huge word. I think it's had a negative impact on some people, but those people, as Russ has said, who have gone and looked at it have said, "Let me be transparent. Let me have an open discussion with a client," and they've put in those rise and fall contracts, and obviously that's made the difference for them.

Bosco Anthony:

I don't see my dentist making any exceptions for his word, or my car mechanic at all. There is a matter of principle there as well in the industry. Here's a question. What happens if you have a member come to you and they're adamant about using cost plus contracts? What would you say to them?

Andy Skarda:

After goodbye, or before goodbye? No, that's a joke. I don't want to, in this forum, promote cost plus contracts, purely because of the pain and the damage that I've seen them cause. But the theoretical attraction of them is they remove the risk. The truth is, the only way that they can remove the risk is if you agree on a target budget with the client and then you as the builder do everything in your power to make that contract land within that target budget, which is a very complicated way of running a fixed price contract.

Andy Skarda:

You can fool yourself into thinking this as a cost plus contract by doing that, but that is the only way that it works. We've alluded to this. The horror stories in this thing are when you offer a client a cost plus contract, I think Sky mentioned this earlier, they become hyper-focused on the cost. Anything else that's been agreed disappears out the window. What you find is every time you submit an invoice, you open up the opportunity for another fight.

Andy Skarda:

Now, those of us who have been married for longer than 10 minutes know what fighting month after month after month can feel like occasionally. It's not nice. To pay for the privilege, we can debate that as well. We can maybe say we do pay anyway. But the point I'm trying to make here is in this cost plus world, every invoice brings about an argument. Neither for the client nor the builder, is that worth it.

Andy Skarda:

Here's the other thing, even in a cost plus contract, your attention to detail becomes absolutely critical. If your carpenters have to redo work, there's no client in the world on a cost plus contract who's going to agree to pay twice for the same thing. I've seen guys with what looks like iron cost plus contracts end up in real trouble because they had to go and do a do-over on something and nobody pays them for that. That just eats their profits right there. We would passionately do our best to convince a client not to go down this road at all.

Sky Stephens:

Influence. Not convince, influence.

Andy Skarda:

There's the good word.

Bosco Anthony:

Influence.

Andy Skarda:

We would influence.

Sky Stephens:

I hate it when people say, "I need to convince them to do that." No, you're going to influence them.

Bosco Anthony:

Or inspire them. 

Andy Skarda:

There we go. We would inspire them.

Sky Stephens:

Inspire them.

Andy Skarda:

There we go.

Bosco Anthony:

All right. Well, let's ask a holistic question. I guess this is a twofold question. One is, are builders struggling with pricing? If so, why is that the case?

Russ Stephens:

The best way to answer that is to maybe share an experience I had over 10 years ago now when I went to visit a builder on the Sunshine Coast. I knocked on his door and his wife answered the door, which opened up onto a massive kitchen. She invited me in. In the corner of this kitchen, the builder was sitting there behind his desk working on his laptop. He was working on an estimate. He said, "I'll be with you in five minutes. I just got to finish this estimate." Then he called me over just to show me what he was doing, because he was so proud of this estimate. He had a price file with every single item priced, every single nut and bolt, every single thing. He had his Bill of Quantities, right down, again, to every nut and bolt.

Russ Stephens:

This thing was a work of art because I'm a bit geeky about numbers, so I was so excited when I saw this. I could have talked to him all day. He was gushing about everything he'd done, and the complex take-off, and the fact that he had all these pricings there. Bear in mind, this was 10 years ago. There was no API connection to suppliers downloading the pricing. He was doing this himself. It was so, so impressive. I said, "Yeah, it's just amazing. Out of interest, how close is your estimate, your budget to the actual when you finish the job?" 

Russ Stephens:

He looked up at me and he looked a bit blank and he said, "What do you mean?" I said, "Well," because I was quite excited by this time, I said, "When you finish the job, you’ve got all your invoices in, how close is it to your budget?" I'm expecting 0.1%, 0.2%. He looked at me and he said, "Oh mate. I don't know." I said, "Well, if you don't know, then how do you know if you're making any money?" He kind of laughed and he said, "Oh, we never make any money."

Russ Stephens:

That gives you an indication there as to the answer I'm going to give you. The answer is, they don't back cost. Therefore, they don't learn. Back costing is the process of diligently aligning every single invoice with a cost centre and comparing it to your original budget. If you do not do that, you will not learn about your project, about where you blew out, where you come in under and you won't refine your budget for your next job. That is where builders struggle.

Bosco Anthony:

Is it possible for builders to switch strategies, go from one to the other? How hard is that?

Sky Stephens:

It's possible, but I will probably just say that nothing's easy in this industry. I think anyone listening to this podcast right now will agree. Changing anything in this industry is not going to be an easy feat. At the same time, nothing worth doing is easy. Of course it’s possible. All you need to do is just get a new building contract for the next one you present. But it's so much more than that, because you’ve got to implement this all the way back into your sales process. Honestly, even back into your marketing, because that's such a unique selling point, a unique value proposition that you can give your clients a fixed price building contract, have a building experience that they are absolutely going to love and just pay one amount. It's one figure.

Sky Stephens:

You can implement that into your marketing. You have to build your sales process around this, of course, because how on earth are you going to get to a fixed price? Well, there's a lot of work that it's going to take. What we teach our builders and the process that we walk our members through is a detailed sales process that involves multiple steps before you even get to drawing up a proper building contract, including doing the design. 

Sky Stephens:

We've done a previous episode on this, Bosco, haven't we, on design and build versus quoting plans, and what the better business model is there. But this then bleeds into fixed price contracts. You can be a design and build company. You can do the concept design agreement, then you can move into a preliminary building agreement, which includes, as part of that package, a fixed price proposal creation. You can even build out that fixed price of that building contract for your clients, and then you get to present it.

Sky Stephens:

Yes, you can switch strategies. It's not as simple as just getting a new building contract from a lawyer. Yes, it includes doing that. It's making sure you've got all the special terms in place so that you are protected, but it's making sure you can sell on that basis and you've integrated it into your whole team and into your sales process. Look at your quoting and your estimating, and even your job scheduling because you want to be as accurate as possible. You're not going to enter into a fixed price building contract without doing all of that homework first. You can switch strategies. Do I think it's the easiest thing? Not really. Is it worth it? Absolutely.

Andy Skarda:

I think the reality here is one or the other doesn't change how much attention you've got to put on your pricing. At the end of the day, to be honest, I think that cost plus would probably put more pressure on you because it is going to be scrutinised every time you submit an invoice. You've got to take that into account in terms of deciding if you’re going to switch. Well, there are advantages and disadvantages in both of them, but pricing and your attention to detail, that diligence that Russ was talking about, I think that there's a greater requirement of that in cost plus than what there is in fixed price.

Bosco Anthony:

What's your most memorable transformation of a builder changing contracts from cost plus to fixed price?

Andy Skarda:

The most memorable is difficult to give you. The most recent is a wonderful one because this was a client who we worked with in Nashville, Tennessee.

Andy Skarda:

He in fact fell into this trap of believing that it's actually easier, and if you don't think it through, it makes theoretical sense that if you start a building business, start with a cost plus job because theoretically you are using your client's money, and therefore you reduce the risk to yourself. But he told us the story about a particular client who got to the point as this thing unravelled and got uglier and uglier, that every month he was having to debate what was and what wasn't a cost. He's now not only debating whether or not that is an acceptable cost, but hang on, we didn't agree that this was a cost in the first place. 

Andy Skarda:

It literally got more and more painful to the point that at the end of the process, obviously he and the client were not on speaking terms at all, and he made absolutely no money out of it at all. In fact, it cost him money. For him, coming to the process, as Sky's mentioned, it's not just the contract. Obviously, what we do is – because we believe and we've proven, in fact, that fixed price contract is the way to go – we've also got a system built around it that gets that to be the natural outcome of everything that a professional builder is doing. 

Andy Skarda:

At the end of the day, it's seeing those transformations where all of a sudden you've got a builder who hated interacting with clients. We get builders who tell us they're choosing to go to spec builds now, which is another whole can of worms. But why? Because they had such bad experiences working with clients. Then we say to them, "Well, what were you doing? How were you working with them?" "Oh, on a cost plus basis."

Andy Skarda:

It really is a scenario of people getting to understand selling on value, not price, number one. Number two, making sure that they're earning decent margins on what they're doing. And then number three, setting up a professional process that walks the client through the entire process. Once they start to see that bearing fruit, they'll never go back again. Ever.

Bosco Anthony:

Is there a scenario where a building company may offer both options to a client?

Andy Skarda:

If I was the client given the option; let's talk about it from a client's perspective. Why would you not take a fixed price contract? I’ll bring it back to anything else we ever talk about. It’s a bit like if you're going to buy a new car. The guy says, "Look, you could pay $20,000 for this car, or why don't you come back every month and we'll work out a price over the next year?" Which one are you going to do? That's essentially what this is. It's a gamble on what might happen somewhere down the road versus here you've got a fixed price and you know what you're going to pay. It’s a dangerous thing to do.

Bosco Anthony:

Speaking of dangerous, can fixed contracts be dangerous to the financials long term? Especially with the current trends that we see in the market?

Russ Stephens:

Well, in terms of dangerous, you're talking about exposure there, aren't you? We've seen builders exposed, but I think just to add onto what Andy was saying earlier, we were advising builders to reprice contracts before the contracts started, before construction started because they were being delayed through no fault of their own. 

Russ Stephens:

When you've got a delay of nine months during the inflation that we've seen on construction costs, and then you've got to start a contract, there's no reason why you should be out of pocket. The right thing to do at that point was reprice the contract, give the client the option to cancel and get their deposit back, or proceed. Where we've seen a lot of builders come unstuck is they didn't do that. They proceeded and then they got halfway through the contract, panicked and then tried to charge the client. That's just not ethical at all. That was the wrong way of going about it. It's not just small builders; a lot of big builders did that as well. That's where it's dangerous. But yeah, like all dangers, they can be mitigated with the right process.

Andy Skarda:

Again, going back to what Sky said earlier, the way to make a fixed price contract not dangerous is to properly set up to do your pricing correctly. If your pricing is done correctly, your materials and labour are properly costed and controlled, for everybody, there's no downside. In fact, as I'm talking, I'm thinking about one of our favourite clients who's based in Adelaide, who at a dinner shared the story where he said he used to quote four jobs. If he got a job, he would go back and see what he'd left out. Because in his mind, it was such a guesstimate anyway. 

Andy Skarda:

The only way he could get a job was if he got something wrong. I think the reality here is how do we take the danger out of it? Be diligent, as Russ has said, make sure that you are going back at the end of every job, checking the budget against the actual. Where were you out? Why were you out? How much were you out? Course correct. Use an external take-off agency if you are not confident in those areas. But the starting point if we're talking fixed price – but in fact it’s the same for either one – is to get your pricing right. Once that's right, you can then handle everything else that comes after that.

Bosco Anthony:

For our listeners out there, how does APB help builders who are potentially not members, but need help with pricing, need help with contracts, need help with resources? Where can they get the support that they need to help them with their businesses?

Sky Stephens:

I'd probably say the best place to start is, rather than focusing on fixed price and cost plus, we have an entire guide and checklist on how to increase your margins. It is focused very heavily, of course, on fixed price building contracts, but it walks you through our pricing for profit methodology, which at the end of the day, cost plus versus fixed price, all you're looking at is the bottom line and which one's going to make you the most net profit. Using a fixed price contract with our pricing for profit methodology will be the best option.

Sky Stephens:

You can download our whole guide on how to increase your margins by using our Pricing for Profit formula. We've popped it into the show notes, we've put it on the website so it's nice and easy to download. 

Sky Stephens:

But of course, if you're not already a member of APB, I'd highly suggest joining so you can actually get these systems, the calculators ready to go and be involved in the forum so you can actually hear what other building company owners from across the world from multiple different countries are saying, who have made that switch from cost plus to fixed price. How did they do it? How long did it take? What steps did they do first? What did work for them? What didn't work for them? What made them finally make the change? That community is really inspiring. Of course, if you're already a member, dive on into Facebook, go through Pricing 4 Profit. They're going to be the most important things to do in the next couple of weeks.

Bosco Anthony:

Well, as the saying goes, when you know better, you do better. Russ, Sky and Andy, I just wanted to thank you for your time again today and your insights, and I look forward to having you back here again.

Russ Stephens:

Thank you, Bosco.

Andy Skarda:

Thanks Bosco.

Sky Stephens:

Thanks Bosco.

Bosco Anthony:

Thank you for listening. Remember to subscribe to Professional Builders Secrets on your favourite podcast platform and leave a review. To learn more about how the systems at APB can help you grow your building company, visit associationofprofessionalbuilders.com. See you next time.