Cost Plus Contract vs. Fixed Price Contracts. Weigh In.

I was just reading some comments from a group of Construction Business Owners on the topic of Time & Materials, (T&M Contracts) vs. the more common Fixed Cost Construction Contracts.
I’ll be very interested in hearing your comments on the concept both from the Contractor’s and the Consumer’s perspective.
For those of you who aren’t clear on the how this works, here’s a general description although there are some variations.
Instead of your contractor providing a fixed dollar amount for your prospective construction project, he or she offers to provide the necessary work and materials for a fee based on the actual cost of the work performed plus a fixed percentage of profit.
(These are often referred to as “cost plus” agreements.)

Technically speaking, T&M contracts aren’t really legal in some states however they are still a somewhat common preference among homeowners and contractors for various reasons.
Following are some of the pros and cons of T&M contracts.

Pros

For contractors, the more the project costs, the more profit goes into their pocket. Although there are preventative measures for this, it could be a bit difficult for the homeowner to regulate.
If a client thinks there are likely to be several changes in design and material selections during the course of the project, she may opt for T&M to enable periodic monitoring and adjustments along the way and avoid the confusion of constantly amending and re-wording the original contract.
When there’s not enough money in the budget to complete a project, some might opt to take a T&M agreement as far as funds will allow and then phase the project as funds become available

Cons

Personally, I would think that anyone would sleep much better knowing the exact bottom line dollar amount of their proposed project going in as opposed to not really knowing the total cost till the project is completed and all of the subs and material suppliers are paid in full. (Reasonable consideration should be given for possible change orders during the course of the construction in a fixed cost contract.) Unfortunately as a result, some projects can get pretty ugly when the budgeted amount for the project is almost gone and the job is only half done.
Since these contracts are often structured such that, the higher the cost of the project, the more money the contractor is able to make, in effect, the contractor has less incentive to save the client money. One way to get around this would be for the client to offer a bonus if the contractor is able to complete the project under a target dollar amount.
Often, in T&M agreements, the contractor is required to solicit multiple bids on each trade and award the project to the lowest bidder. This often results in a contractors worst nightmare. Personally, I seldom need to solicit for multiple bids since I’ve spent several years of trial and error to find the best subs in every trade for the fairest price. But in the rare case where I do need to acquire multiple bids I almost never choose the lowest bidder. Trust me on this one, far too often this is the recipe for disaster and it only takes one bad choice of subs to turn an otherwise successful project into an organizational mess.

Over the years I’ve known several people on both sides of the contract who prefer to work on T&M terms however I would have to rate this among the Top 5 Causes for Contract Disputes.

Click Here for more insight from Michael Stone, of “Construction Programs and Results”, on Cost Plus Contracts from a Contractors Perspective.

2 thoughts on “Cost Plus Contract vs. Fixed Price Contracts. Weigh In.”

  1. Personally I think fixed cost for construction company would be best option. As from homeowner point of view he knows what he is paying for and construction company knows that the sooner he finish his job then they can move on to next project. Hence when you are on hourly rate you have harder time to predict how long the project will last for and when should they schedule for the next project start date.

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