Know Your Payment Options When Remodeling

Homeowners 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.

Here are the basic types of payment plans you can select:

The Fixed Fee Contract

The 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.

This 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

This 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

This 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 some.

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 Consumer Services