In the bustling construction world, where complexity and uncertainty often reign, it can be hard to choose a pricing structure for your projects. But amid the chaos, open book pricing can provide a foundation of trust between you and your clients.
By embracing this approach of transparency, construction companies empower their clients to make decisions and gain their satisfaction in the process. In order to continue to grow your construction business, it’s important to consider the strategies that work best for you and help you achieve your goals.
Read on to learn how open book pricing can benefit your construction business, as well as the right time to use open book vs. fixed pricing for a project.
What is open book pricing (aka cost-plus contracts)?
Open book pricing, commonly referred to as cost-plus contracts, is a financial agreement in which your client pays all the actual costs for construction. When using open book pricing, you’ll also add in a percentage or a flat fee markup on materials and labor. That markup will cover construction overhead and profit margin. Your clients can see margins and all costs associated with the project.
The status quo: Fixed pricing
In a fixed price model, the total cost of the construction project is predetermined and remains unchanged throughout the project’s duration. The actual costs are covered by the builder. Many times that means you’re losing profit margin at the end of the project while trying to get your clients over the finish line.
Using a fixed price model in a time of uncertainty, such as material shortages and economic fluctuations, could result in the price you quoted months ago tanking your profit for the year. It also leaves your clients in the dark about costs and may cause your company stress throughout the project as prices increase.
The value of open book pricing
In an open book project, your profit is a fixed fee or percentage on top of your actual costs. With this structure, all overages or cost savings are passed on to the client. This straightforward financial structure creates an environment of total transparency and trust between you and your clients.
For builders, open book pricing protects every part of the project, not just material costs. It can be less complicated than putting together a cost-identifying budget and may even trim staff hours by simply exposing the books.
When to use open book pricing
Deciding when to use open book pricing can be a bit intimidating. But understanding the value you get from using this structure can make that decision easier. Here are a few ways open book pricing can benefit your projects.
To encourage collaborative client relationships
When using open book pricing, you create a client relationship that promotes transparency, trust and active participation. Since clients can verify the accuracy of cost estimates, they’ll feel more in the loop with the project. They can use that information to participate in cost management discussions and make informed decisions about their own project.
To deal with complex or unique projects
When you’re faced with a complex or unique project, open book pricing can be beneficial because it allows for detailed cost breakdowns. When you openly share cost information on these projects, there’s potential to find cost-saving measures that can be explored collaboratively with the client.
To achieve more flexibility and adaptability
Open book pricing allows for a greater degree of flexibility and adaptability compared to other pricing methods. It provides the ability for real-time adjustments based on changing project requirements, market conditions or unforeseen circumstances. The flexibility of this structure enables proactive decision-making for the contractor and client.
When to use fixed pricing instead of open book pricing
In some situations, fixed pricing is a better option. Since the price is predetermined and unchanging, it can be beneficial to use with simple and quick projects. Here are a few specific situations when fixed pricing may be the right choice.
Small, simple projects
Fixed pricing is good for small and simple projects because it eases the decision-making process for clients. They can make informed decisions based on the predetermined costs without needing to negotiate and continually monitor a project’s expenses. When a client needs a small, simple project done, they don’t want to worry about budget overruns.
Competitive bidding
With fixed pricing, all bidders are required to submit their bids at their own predetermined and uniform prices. It eliminates the potential for bidders to underbid or manipulate their prices to gain an advantage. It also provides clients with the clarity to compare the bids against each other and make choices based on their budget.
Limited client involvement
Fixed pricing is beneficial when clients have limited knowledge or time to participate in the decision-making process. It provides a straightforward and predetermined cost for the project. With this structure, the client has peace of mind knowing the cost is fixed and agreed upon upfront, and they don’t have to monitor it.
Urgency and time constraints
With fixed pricing, the client can quickly agree on a price without lengthy negotiations. This enables the project to start quickly and saves time. Fixed pricing also allows for streamlined decision-making to prevent delays.
Established trust and relationship
A fixed price structure is fitting for clients you already have an established relationship with, since you’re both familiar with each other’s expectations and preferences. The client trusts you, and there isn’t a need for extensive price negotiations. With fixed pricing, the client can have confidence in your commitment to delivering value within the agreed-upon cost.
Buildertrend supports both open book pricing and fixed pricing
Buildertrend provides both options for your cost management strategy so you can make the right decision for your business and your specific projects.Â
Within the Buildertrend Customer Portal, homeowners can see expenses through the Bills and Purchase Orders tool – or the Budget if you allow them to. They can compare estimated costs to actual costs and make decisions based on the information. When clients have access to the numbers, you limit misunderstandings and disputes that can negatively affect your company.
Homeowners can also effortlessly make material choices right from the Selections feature, keeping satisfaction high and your jobs moving forward. And they can make payments on the platform, so you get paid faster.
With access to a construction client portal, your clients feel at ease about their investments in the project, and you’ll foster a relationship built on trust and transparency.
Want to learn more about open book pricing in Buildertrend? Contact us today to get started.
Open book pricing FAQs
Get answers to the most common open book pricing questions.
Open book pricing promotes trust and transparency between the contractor and the client. It shares the costs openly, allowing the client to review them. It also enables clients to make informed decisions on materials, suppliers and project scope to ensure the project stays within their budget.
Risk is managed in open book pricing by providing a clear and detailed contract that minimizes misunderstandings and disputes. The clients can regularly monitor the project and work with the builder to navigate challenges and ensure its success.
Yes, there are challenges with open book pricing. One is tracking the cost effectively. Construction projects involve many variables and unforeseen circumstances, making it challenging to predict and control expenses. Open book pricing also requires a high level of transparency and demands significant communication between the builder and client.
Yes, it’s possible to combine open book pricing and fixed pricing for a project. In this scenario, the builder can provide the client with a fixed price for the overall project while still maintaining transparency through open book pricing. This way, the client has a clear understanding of the total cost, but they still have the breakdown of expenses, including materials and labor. It’s the best of both worlds.
Estimating made easy
Deliver accurate estimates in half the time, every time.
We’re getting back to basics with actionable strategies for profitability – and tips directly from top builders on the importance of financial management.
We believe in building a community for construction – sharing is a big part of that. If you have industry expertise or a story to tell, your voice can reach thousands here.
