Fixed Price Definition
A fixed price contract is a final set price to build a complete home as agreed upon in the scope of work with the clients. The price is fixed regardless of the cost of productivity. Fixed price contracts are a good way to get piece of mind on your actual cost of construction.
Keep in mind that if the scope of work changes, or if there is an unforeseen situation, the contractor will provide a written change order outlining the new scope of work and new associated costs for approval prior to starting any new work. A fixed price is a fully defined scope of work with one bottom line price where the client knows exactly what the project will cost before the project begins.
A cost plus contract is the actual cost of materials & productivity, plus an agreed profit (or builder’s fee) on top of any cost that occurs on a project. Remember, the agreed upon profit is exactly that: a “PROFIT”. Profit is over and above the fees to cover wages or the costs of administrative work. Sometimes when you see a higher fee (usually 20% +) the administration/office costs may already be included. If you see a cost-plus at 10%-15% this would indicate this number is profit only. Read your contract in full to determine what the percentage fee is going towards.
Pros of Fixed Price
The most beneficial part of a fixed price is the client’s ability to have an exact budget in advance and not have to worry too much about major price changes. The client is told the exact price prior to starting the project, which adds comfort and security to the process. Once the price has been agreed upon, the client knows the total and and should not contest the amount owed. The fixed price approach works best for clients who are worried about the final dollar figure, have a very specific budget cap, and have already selected and defined the majority of their finishes.
Pros of Cost-plus
In a cost-plus scenario the client gets to see all costs included, all invoicing if requested, plus the agreed upon fees. There is transparency in billing and no additional inflation of costs to protect the builder’s profit from being eaten up by cost overruns. Some people also feel a cost-plus contract effectively prevents the contractor from using less superior products to save money, however we tend to disagree. As great builders/renovators we always use quality products, regardless of the pricing structure in order to minimize potential warranty issues that can cost us as the builder thousand of dollars in the future. There is a temptation for a few of the less qualified/experienced builders out there to under-estimate cost-plus projects in order to win the bid, but this isn’t beneficial for anyone in the end. Cost-plus works best for clients who want the flexibility to be able to make decisions on final materials as the process moves forward, or are more focused on getting exactly what they want rather than worrying about adhering to a strict budget.
Cons of fixed price
To a builder, presenting a fixed price contract is taking a huge gamble that everything in the construction process will go smoothly and there won’t be any cost overages. In construction estimating there is always something that was not accounted for, a mismeasure or an “I forgot to add this” issue. If the costs to complete the project are greater than estimated, the risk of loss is on the builder, not the client. Some line items will end up over budget, but likewise, some will come out a bit under budget as well. In return for absorbing the risk the builder will keep any savings made over and above the actual costs, but likewise, if we’ve underestimated the amount of time it takes to finish the project then we as the builder will have to cover these costs. In our experience on a fixed price, if you are a good estimator the differences generally even out.
Cons of a cost-plus
A cost-plus contract doesn’t let the client know the exact price of the project until completion. Hoping to hit or come under budget is every client’s dream, but with a cost-plus contract there is never a guarantee that you will. Some builders won’t place top priority on correct ordering of materials or productivity of the trades/employees because they know they get a guaranteed profit with a cost-plus contract. There is less urgency to hustle or order the correct amount of lumber. With a fixed price, the contractor ensures he orders the correct amount of materials the first time as well as keeping the workers on time and productive. Otherwise the overages will come out of his profit. Material and labour cost increases are the responsibility of the client and thus will increase the builder’s profit. This means there is very little incentive for the builder to try to control material costs. Within this option there is a real potential for disputes over item costs and how those costs are calculated. It’s very important to have a comprehensive contract that defines all details clearly, as a well thought out document can make life easier for everyone involved.