When you’re looking at building, renovating or repairing a property, then a construction contract is essential to the process. Whilst contract estimating services can help you immensely with estimating the cost of your project, there are two distinctive types of construction contracts that you should know the difference between. Cost-plus contracts and fixed-price contracts both have their own unique perks that will suit different circumstances. Today’s blog will be covering everything about the two types of contracts and what their pros and cons are.


Cost-plus contract

The fundamental concept behind a cost-plus contract is that the owner will have to pay the expenses for the construction as well as an extra profit margin on top to cover the contractors overheads. The building materials – as well as labour costs – are included and any extra materials that need to be bought for the construction are also added to the costs. 

This type of contract is created to ensure that the contractor is paid for direct and indirect (overhead) costs, while also allowing them to make a profit on top. The profit is usually a predetermined percentage and represents the “plus” side of the contract. However, the contractor must provide sufficient evidence in documentation form to prove that all expenses were used towards the construction. 

Cost-plus contracts can sometimes be harder to determine as the final price is not a fixed number. Payments are also made regularly with a cost-plus contract – as opposed to an initial lump sum. This is because payments are made as new jobs come along within the construction project. Clauses may also be put into the contract to establish maximum spend caps and more.

Pros

  • It acts as an incentive for builders to not use cheaper materials, as the money is ultimately not coming out of their own pocket.
  • A cap can be put on the project if the owner so chooses.
  • Flexible for owners as they can closely monitor the progress and cost of the project – since they’re being invoiced when new materials are being purchased.

Cons

  • Cost records must be kept and documented meticulously by the contractor or else there could be issues with being paid for particular materials.
  • Since contractors will have to fork out the initial costs for materials before they can invoice them to the owner, it can prove problematic if the contractor doesn’t have the funds to finance this.
  • The higher the cost becomes the higher the “plus” part of the contract becomes – meaning it’s in the owner’s interest to keep the costs as low as possible.

Fixed price contract

fixed-price contract is a lot simpler than a cost-plus contract. With a fixed-price contract, the entire cost of the building is agreed upon in a set price. This set price includes all building materials and profit that the contractor will make – as well as the labour hours. The fixed price that is agreed on and signed by the owner and contractor is all that will go towards the project. 

This means that the contractor will have to work on the project with the budget they’ve been given – as opposed to a cost-plus contract where they can purchase the materials regardless of the cost and then invoice the owner for them. If the contractor goes over budget within a fixed-price contract, then they’ll have to use their own money to fund the project.

Sometimes, there are particular provisions listed in the contract that will allow for extra costs to be incurred. Factors such as a survey report could cost extra and may not be included in the initial fixed cost – so be sure to thoroughly read the contract to be aware of all the costs.

Pros

  • It can be easier to budget what is needed since there is a fixed number that has been decided on.
  • No extra costs and if the fixed cost does need to be changed, then it must be done so mutually and detailed in separate legal documents.
  • The owner may not supervise as frequently as with a cost-plus contract.

Cons

  • It’s on the contractor to complete the project within budget and within the time frame that has been set – or else they’ll have to cover extra costs themselves.
  • Changes to the original plan may not go down well with the owner.
  • Cheaper materials may be used to stay within budget.

Looking for contract estimating services

Accent Estimating is a premium and experienced business that specialises in contract estimating services. Our decade–spanning portfolio includes commercial, residential and industrial construction projects – as well as trusted competency involving both cost-plus and fixed-price contracts.

So, if you’re looking for contract estimating services, then please get in touch with us by calling 0413 953 869 or filling out the form on our website.

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