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Cost-plus deals tend to benefit contractors

February 27, 2009

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Q: We are planning to remodel our home, and the contractor says we should agree to a cost-plus contract that would call for us to pay for the contractor’s building costs and allow him to tack on an extra amount at the end of the project for profit and overhead. We have always signed a contract based on a fixed-price for the jobs. How do cost-plus deals work? Are they good for the homeowners, or do they benefit the contractor?

A: Cost-plus contracts usually work in favor of the builder or remodeling contractor, rather than the property owner.

Under a typical cost-plus deal, the contractor gets paid for the materials needed, but also negotiates his profit margin. This can save the homeowner money if the contractor keeps costs under control and accepts a modest profit margin, but can prove disastrous if, say, the cost of lumber or even tile for the job suddenly goes up.

There are several types of cost-plus contracts. The worst is probably the “cost plus a percentage of cost” deal, which requires the owner to pay an even higher fee if expenses are more than expected.

Most people remodeling a home or building a new one would probably be better off choosing a fixed-price contract that they can afford instead of gambling that their job will come below a contractor’s cost-plus proposal.

The bank that financed my home and issued my primary credit card failed and was purchased by another bank. The new bank sent me a letter stating that the rate on my credit card is going up. Is this legal? Also, does this mean that the new bank can raise the rate on my fixed-rate mortgage?

Federal law allows all banks to raise credit card rates, provided that customers have at least a 15-day notice. So, the rate hike is legal.

However, federal banking laws prohibit the new bank from making major changes to your home loan. It cannot change the terms or payments on your fixed-rate mortgage, but it can change the address to which your monthly checks must be mailed.

We are behind on our mortgage payments. If we sign a quitclaim deed that gives our ownership interest in our home to a private investor, would we still be required to make the monthly payments?

Yes, you will, unless the investor is approved by your lender to take over the mortgage payments by himself.

Let’s say your home is worth $250,000 and the outstanding balance of your loan is $100,000. If you quitclaimed the deed, the investor would get your house and the $150,000 in equity — but you would still be obligated to make the monthly payments.

We are confused about some comments you made about living trusts and how they can save money. If my husband and I create the type of inexpensive trust that you wrote about, would we be the “trustees” or the “beneficiaries”?

You and your spouse would be the trustees. Your beneficiaries would be the people or group that you want to inherit the property after you die.

Regardless of which beneficiary (or multiple beneficiaries) you choose, forming an inexpensive trust now could help to ensure that your heirs will not have to go through the costly and time-consuming probate process that can gobble up much of an estate left by those who die with a common will.

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