The contractor's price: Flat fee or percentage better?

What is better? A flat fee for a contractor's services? Or a fee based on a percentage of the job costs, such as drywall and plumbing?

Frequent Pardon Our Dust commenter Sheila has a strong opinion that a flat fee is much better for the homeowner. Here's what she wrote:

my brother-in-law is a high-quality home builder and remodeler in Houston, TX and coming from a business/consulting background, he charges a "flat fee" for his company's services, with additional charges for change orders and delays on the client side. he passes through all materials and subs at cost, with invoices, so his clients COMPLETELY trust him and he has incentive to use the best materials, best subcontractors, get the best prices and be very efficient. personally, i would much rather he try to get me great prices on materials and subs without feeling conflicted, and i would rather know exactly what he is earning - and choose to pay him that amount up front. and yes, i would pay him PLENTY with that kind of system. it's not about being cheap so much as about being smart with spending.

being an amateur student of real estate and remodeling of the past few years, i have come to the conclusion that "percentage" based compensation is crap, and usually creates conflicts of interest. why should a buyer's agent, a mortgage broker or a contractor get paid MORE for getting a worse deal for their client? it's disastrous and breeds mistrust, and it's time for people to re-think the model to better reflect the realities of the relationship and to base compensation on quality of work completed in the client's best interest. the contractors who provide excellent services and materials in a timely way would then shoot to the top of their industry and command top dollar. there is nothing quite like having to cover the cost of a "do-over" to sharpen the attention and make sure something is done right the first time, so this model would shorten construction time, lower materials/labor costs, and increase attention to detail. those who do those jobs best will get paid the most, instead of the opposite. win/win.

even if the total on a job were to come out exactly the same, i think most homeowners would feel a certain satisfaction in having gotten a 25% discount on their cabinets, as well as in having paid a great contractor a good fee for a job well done, rather than feeling that they grossly overpaid for materials, and the contractor probably cut some corners because he needed the markup and savings to make rent. respect works both ways and people are usually glad to be in a position to choose to pay more for better work (or the opposite) when given the opportunity, so the pricing system should be based on the contractor's actual quality of work done in the best interest of the client.

in a relationship built largely on trust, it helps to have a transparent system that encourages trust. commissions and markups are antithetical to this.

Sheila makes some good points. Do you agree or disagree with her comments?

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Comments

[Tom Barber]

what is a standard percentage and what is a standard fee working here in Southern California?

[Carl Heldmann]

Never pay anyone by the hour or as a % of cost! A flat fee with YOU shopping for and paying for materials is the safe way.
Carl's quotes:
1. If you want to see how long a "job" can take, pay " them" by "the hour".
2. If you want to see how much a "job" can cost, pay "them" a percentage of it.

Carl Heldmann