Guest Blogger: Doug Hanna is president of S&H Construction, Inc. located in Cambridge MA. His firm specializes in residential and historic renovations, custom home building, renewable energy, landscaping and site work. Doug was recognized as the 2013 “Remodeler of the Year” by the Builders & Remodelers Association of Greater Boston (BRAGB).
Contemplating the Difference: Fixed Cost and Cost-Plus Contracts
As a general contractor, I often find myself involved in good – natured arguments with some of my fellow builders regarding the advantages and disadvantages of “fixed cost“ versus “cost plus/time and materials “ contracts. There are distinct arguments for each model, depending on the type of job, the type of structure, as well as the nature and level of completion of the plans and specifications. Having used the cost-plus/time and materials (CP/T+M) contract for the last thirty years, I am somewhat biased towards its benefits.
However, I understand the allure of a fixed-price contract for both the owner and the contractor. Fixed cost is most appropriate with a very thorough, well-defined set of construction documents (plans and specifications) and even more so if those complete documents are produced for new construction. In a less well-defined job with plans in progress, or in an older home, cost-plus/time and materials may be more appropriate simply because there is too much that is unknown to be able to estimate with full certainty what it will take to perform the work.
On most projects of any size, no matter which contract is used, anywhere from 50 to 90 % of the work will usually be done on a fixed cost basis by subcontractors. CP/T+M jobs are generally “open book”, meaning that the owner has complete access to estimates, proposals and invoices for the entire project. Still, there can be a somewhat more open-ended aspect to CP/T+M contracts, and some people simply are not comfortable not knowing exactly what they are going to pay up front.
Risks and rewards for both options
There are more risks for a contractor operating under a fixed price contract, but there is also the possibility for more profit. Fixed price contractors are more likely "bidding to the plans", meaning the bid is based strictly on the plans as they are, even if they are not fully developed. This is only natural. If contractors are only getting a fixed amount, they must base their estimate strictly on what the plans show. If you proceed with a project having only rough sketches or incomplete plans, it is very likely there will be changes (change orders). The more changes there are, the more things cost, with an attendant extension of schedule.
Again, if you have fully developed plans and specifications, and especially in new construction, where most factors are known and manageable, fixed price makes sense. With phased design, where plans are being developed on a fast track as construction proceeds, and especially in renovation work, it’s my opinion that CP/T+M is the better choice.
Try to become as educated as possible on the contract options available and get a good tight set of plans and specifications from your architect. Then do your homework when it comes to the contractors you invite to bid on your project. There are excellent contractors in both the fixed cost and the cost plus/ time and materials worlds.