There are many variables to consider when you decide whether to utilize a cost plus or fixed price contract for your next project. Each type of contract carries benefits and drawbacks for the contractor and the buyer, so developing a thorough understanding of each contract and what circumstances dictate their use can help you make the right decision next time you enter a contractual obligation with a client.
Our Jacksonville construction lawyers at Cotney Construction Law are knowledgeable about the positives and negatives of cost plus and fixed price contracts. In this article, we will discuss both types of contracts in detail.
Cost Plus Contracts
A cost plus contract establishes a two-prong approach to project appraisal. First, the contractor estimates the base cost of the project. The base cost includes the price of materials, labor, and overhead. The “plus” is the profit. In a cost plus contract, the profit is calculated separately before construction and written into the contract as an additional fee.
Fixed Price Contracts
A fixed price contract establishes a single, lump sum cost for a construction project. This type of contract is an agreement to complete a project at a set price that includes all costs and profits. At first glance, these two types of contracts might appear to be very similar, but these small, distinguishing characteristics can have huge repercussions down the line for both the contractor and the buyer.
Pros and Cons
A cost plus contract guarantees profit for the contractor. It is stated in the contract that the contractor will be reimbursed for all costs and still generate a profit. Conversely, a fixed price contract establishes a project’s price beforehand. If costs change, the contractor is already locked into a contract, which can result in the contractor losing money on the project.
Cost plus contracts benefit buyers because the contractor can incorporate high-end materials into their base cost to produce a top-tier product. If the buyer has already agreed to cover the cost of construction, there’s no incentive to cut costs. Cost plus contracts eliminate the inflation that occurs in fixed price contracts when contractors overestimate costs to protect themselves from unexpected costs.
Unfortunately, cost plus contracts can face disputes over price calculations. Entering a cost plus contract requires both parties to clearly define their terms in exhaustive detail. A thorough breakdown of indirect costs and overhead is almost always required in a cost plus contract.
For the buyer, entering a cost plus contract with a contractor can cause anxiety because the buyer won’t be certain of the final cost until the project is completed. Inserting a cost-control clause in the contract can help protect the buyer from exorbitant costs.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.