Ed Earl and Paul Sanneman, both previous guests, share the reasons why they like cost-plus contracts. As a fixed-price builder myself, I wanted to get the perspective from the other side of the aisle.If you want to learn more about Paul and Ed's work, visit https://residentialcontractorservicesgroup.com.Enjoy the episode!   “The wise man knows exactly what value should be put upon everything.” — Seneca     Over my 15 years to date of structuring real estate development deals, I’ve screwed up many a deal. I’ve left money on the table. I’ve shouldered too much risk. But luckily, on close to 100 projects I’ve sponsored, I’ve only ever lost money one one. The rest have performed well, and a good many surprisingly well (listen to my story in Episode 57).What has been the single biggest improvement I’ve made in how I structure my deals? I’ve started thinking of the deal components as separate “Value Buckets.” As a result, I have a much easier job identifying an equitable deal for everyone and easily selling it to my investors.   Value Buckets in a NutshellTo use value buckets, think of deal structuring as an accountant would. Each deal is a new company in a sense, and that company will have assets, liabilities, and equity that each of the parties to the deal should value at some notion of fair market value. This sounds basic, like a foregone conclusion, but many people miss this point. And when they start thinking of projects through Value Buckets, what seemed like a reasonable deal may no longer be.   Most Common Value Buckets  DeveloperThe developer finds, organizes, and sponsors the deal. He arranges all capital and oversees professionals such as accountants, lawyers, etc. The time, effort, and expertise in this role needs to be considered and compensated, usually as a percentage of back-end profits in the home building business. My company receives 50% of the back-end profits in exchange for this role.  General ContractorHome builders often plays the role of developer and general contractor in a speculative deal, which is why it’s important to distinguish these. A home builder needs to understand what his profit would be on this project if, hypothetically, it was a simple fee-based project for a client. Why? Because the additional roles the builder is playing in a speculative project, plus the risk, should result in a higher projected income to the builder versus a project for a client.I establish up front a fee between 7-8% of a deal’s projected sale price, depending on the size and complexity of the project. This fee is paid out to my company with the construction draws from the bank. This fee covers my company’s overhead in the deal but not my general contractor profit, which I defer to the end so that my investors and I are better aligned.The back-end profits I’m expecting to receive should be enough to account for both my role as general contractor and separately as developer. If the projected profits aren’t sufficient in that sense, I either restructure the deal or pass on it.  InvestorThe investor may be putting up all the cost of a deal, or if financing is involved, the portion of equity that sits behind the debt in...

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