Cost Plus vs Fixed Price Contracts in Construction: Pros, Cons and Choosing the Right Option
Cost plus contracts and fixed price contracts are two common methods used in the construction industry to determine the cost of a project. Each method has its own benefits and drawbacks, and choosing the right one for your project depends on the specific needs of your business.
Cost plus contracts, also known as cost reimbursement contracts, are contracts where the contractor is reimbursed for the actual costs of the project, plus a fee for their services. In this type of contract, the contractor is not taking any financial risk as they are guaranteed to be reimbursed for the cost of the project. The benefits of cost plus contracts include:
Flexibility: Cost plus contracts allow for changes to be made to the project without affecting the overall budget. This is beneficial for clients who need to make changes to their project mid-way through the construction process.
Transparency: With cost plus contracts, clients are able to see the actual costs of the project, making it easier for them to budget and manage their expenses.
However, there are also some drawbacks to cost plus contracts, including:
Cost overruns: There is a risk that the contractor may over-bill for the actual costs of the project, leading to higher costs for the client.
Incentive to overspend: The contractor may have an incentive to overspend on the project in order to increase their fee.
Fixed price contracts, on the other hand, are contracts where the client agrees to pay a fixed price for the project, regardless of the actual cost of the project. In this type of contract, the contractor is taking on the financial risk as they are not guaranteed to be reimbursed for the actual cost of the project. The benefits of fixed price contracts include:
Budget certainty: Clients are able to budget for the project with certainty, as they know exactly how much they will be paying for the project.
No cost overruns: The risk of cost overruns is reduced, as the client is only paying a fixed price for the project.
However, there are also some drawbacks to fixed price contracts, including:
Lack of flexibility: Fixed price contracts do not allow for changes to be made to the project without affecting the overall budget.
Unforeseen costs: There is a risk that the contractor may incur unforeseen costs that are not covered by the fixed price contract, leading to higher costs for the client.
In conclusion, both cost plus contracts and fixed price contracts have their own pros and cons. Choosing the right contract for your project depends on your specific needs and the risks you are willing to take. If you value budget certainty and reducing the risk of cost overruns, a fixed price contract may be the right choice for you. However, if you need more flexibility and transparency, a cost plus contract may be a better option.