If you’re embarking on a construction project, one of the first decisions you’ll make is which contract structure to use: cost-plus or fixed price. Both have distinct advantages, depending on your priorities, budget flexibility, and risk tolerance. Here’s a closer look at what each entail, their pros and cons, and what you should watch out for as a customer.
What is a Cost-Plus Contract?
In a cost-plus contract, the client agrees to pay for the actual costs of labour, materials, and other expenses, plus an additional fee for the builder’s profit, typically a fixed percentage or a set dollar amount. Essentially, the contractor is reimbursed for all project costs and receives an agreed-upon fee for their services.
Pros of Cost-Plus Contracts
- Flexibility: Ideal for projects where the scope is difficult to define at the outset. Changes and upgrades are easy to implement.
- Transparency: Clients see where every dollar goes, as detailed receipts and reports are typically provided.
- Potential Savings: If materials or labour come in under budget, clients may save money.
Cons of Cost-Plus Contracts
- Lack of Cost Certainty: The total project cost can be unpredictable, which may lead to budget overruns.
- Higher Oversight Needed: Because costs can vary widely, clients need to monitor expenses closely to avoid unnecessary spending.
- Time Consumption: This type of contract often requires frequent updates and approvals, which can slow down the process if communication isn’t smooth.
Things to Watch For
Cost-plus contracts require a high level of trust and open communication. Be sure you’re comfortable with your builder’s transparency and that you understand the markup percentage or fee structure. Consider setting a cap on costs or a “not-to-exceed” clause to limit potential overruns.
What is a Fixed-Price Contract
With a fixed-price contract, the builder agrees to complete the project for a predetermined price. This cost is calculated based on detailed project specifications, so the price won’t change unless both parties agree to alter the scope of work through a change order.
Pros of Fixed-Price Contracts
- Cost Certainty: Clients know the final price upfront, making budgeting easier and more reliable.
- Reduced Financial Risk: If unforeseen price increases arise, they’re typically covered by the contractor, protecting the client from unexpected costs.
- Less Oversight Needed: Fixed-price contracts require less day-to-day involvement from clients, as the contractor is responsible for meeting the budget.
Cons of Fixed-Price Contracts
- Less Flexibility: Changes or additions to the project require formal change orders, which can be costly and time-consuming.
- Higher Initial Cost: Contractors often build in a buffer for unforeseen expenses, which may lead to a higher overall bid compared to a cost-plus structure.
- Potential for Lower-Quality Materials: Some contractors may choose to reduce costs by opting for lower-grade materials or rushing to complete the job on time.
Things to Watch For
In a fixed-price contract, it’s essential to review the project scope and specifications in detail. Clarify what’s included in the price and discuss quality expectations for materials and workmanship. Ask about the process for change orders and how they’re priced, as these can quickly add up.
Which Contract is Right for You?
Both types of contracts have merit, depending on the project’s scope and your comfort with potential risks:
- For Smaller, Well-Defined Projects: A fixed-price contract is often a better fit for projects where the design and specifications are set, and there’s little chance of needing changes.
- For Complex, Open-Ended Projects: A cost-plus contract may be more suitable when it’s difficult to determine the full scope or cost upfront. This can apply to renovations, restorations, or projects involving high-end materials and finishes.
Ultimately, the right contract type depends on your goals, budget flexibility, and how much you want to be involved in the project’s daily management. If you have any uncertainties, consult with your builder to determine which approach will best support your project’s success.
