Open Book pricing, also commonly referred to as cost-plus contracts, is a financial agreement in which your client pays all of the actual costs for construction. Using open book pricing, you will also add in a percentage or flat fee markup on materials and labor which will cover your overhead and profit margin.
For many builders, this is a terrifying concept. They don’t want their clients to know their margins. They don’t want their open book proposal taken to a competitor. Then don’t want their business structure to be out in the open.
The Status Quo: Fixed Pricing
In a fixed price model, you would estimate the total price for all construction-related activities, and variations between the initial estimate and the actual costs are covered by the builder. For many, that means you’re losing profit margin at the end of a project while trying to get your clients over the finish line.
Using a fixed price model in a time of uncertainty, like when there are material shortages and economic fluctuations, means that the price you quoted months ago may tank your profit for the year. It also leaves your clients in the dark about costs and may cause you and your company stress throughout the project as prices increase. With a fixed price structure, the financial risks are owned entirely by the builder.
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, and typically all overages or cost savings are passed on to the client. This straightforward financial structure creates an environment of total transparency between you and your clients.
For builders, open book Pricing provides protection on every part of the project, not just materials. It can be less complicated than putting together a cost identifying budget and may even trim staff hours in budget meetings with clients by simply exposing the books.