Fixed price vs cost-plus contracts

Understanding Fixed Price and Cost-Plus Contracts in Construction

Fixed price vs cost-plus contracts are two common types used in construction projects. Each has different ways of managing costs and risks between the client and the contractor. Knowing how they work helps you choose the right contract for your project.

Fixed Price Contracts are also called lump sum contracts. Here, the contractor agrees to complete the project for one set price. This price is agreed on before work starts and will not change, unless the scope of work changes.

Advantages of fixed price contracts include:

• Easy to budget for, since the total cost is known upfront.
• Contractor has an incentive to control costs and finish on time.
• Less administration during the project because no extra cost claims are needed.

However, fixed price contracts also have downsides:

• Less flexibility if design or site conditions change.
• Contractor may include a risk premium, making the price higher.
• Disputes can occur if the scope is unclear or changes happen.

Cost-Plus Contracts work differently. Instead of a fixed amount, the client agrees to pay the actual cost of work plus an agreed fee or percentage as contractor’s profit. Costs are verified by records and invoices.

Benefits of cost-plus contracts include:

• More flexibility to adjust work during construction.
• Better if the project scope is unclear or likely to change.
• Client sees actual costs and can control spending more closely.

Drawbacks of cost-plus contracts are:

• Harder to budget because final cost is unknown.
• Less incentive for contractor to control costs.
• More administration needed to track and approve costs.

Choosing the Right Contract

1. Use fixed price when the design and scope are clear and unlikely to change.
2. Choose cost-plus if the project has many unknowns or changes are expected.
3. Consider risk tolerance: fixed price places more risk on the contractor, cost-plus on the client.
4. Think about your ability to manage costs and contracts during the project.

In summary, fixed price vs cost-plus contracts each have their strengths. Fixed price contracts offer certainty on cost and simple management. Cost-plus contracts offer flexibility but less cost certainty. Understanding these differences will help you pick the best contract type for your construction project.