At Cotney Construction Law, we understand that construction professionals face many challenges when completing projects. One of these challenges is the rising cost of doing business in this industry. Labor costs, material costs, and interest increases are just a few of the reasons why costs are skyrocketing.
Saving money is a major goal of every contractor and subcontractor, but they must employ creative methods to combat price increases. This short article will focus on pricing strategies that contractors can use to cut costs. Contracts come with a certain level of risk; therefore, we highly recommend consulting with a Jacksonville construction lawyer to ensure you enter the right contract to protect your bottom line.
A fixed price strategy is a contract where a set price is established for a project. Contractors assume both the risk and benefits. The price remains constant regardless of the actual time and materials used for a project. This means that if the job actually cost more than estimated, the contractor will absorb this risk. On the other hand, if the cost falls under the original price, the contractor makes more than originally anticipated.
The T&M contract is used when the scope of work and pricing for work and materials are unclear. This agreement works for conditions and items where cost estimates are difficult. There is no pricing cap on the agreement; however, regular tracking of job progress and costs is conducted to ensure that costs remain manageable for owners.
A not-to-exceed contract is also known as a guaranteed maximum price contract where there is a cap on on how much an owner will pay the contractor for a project. The contractor is only compensated for actual costs incurred. However, the owner pays the contractor for the actual costs to perform the project, regardless of whether the final costs come in under or over the contract price.
Additional Pricing Strategies
Additional pricing strategies include the aggregate not-to-exceed and the allowance. An aggregate not-to-exceed allows contractors to better manage their risk. If the costs are under the agreed price in a particular area of a project, that contractor can apply the difference to another area that may contain a pricing overage. An allowance contract is similar to the T&M; however, the scope of work is known to some extent which aids in a general estimate. In both types of agreements, the owner and contractor(s) split the surplus in some form, which gives the contractor extra performance incentives. Nevertheless, rely on the expertise of a Jacksonville construction attorney when selecting and drafting your contracts.
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.