Fixed Price Contracts Versus Cost Price Contracts

When considering to build with a builder clients must decide between two types of contracts these being a Fixed Price Contract or a Cost-Plus Contract. A Fixed Price Contract is where the builder agrees to complete the build at a fixed price where as a Cost-Plus Contract is where the client agrees to pay for the cost of materials plus a percentage margin on top which is the builders income from the job. The margin can range but on average this is around 20% of the cost of each invoice presented to the client.

For years builders have been using Fixed Price Contracts as this has traditionally been the preferred choice for clients however due to the current economic situation with material shortages and the costs of materials increasing many builders are now encouraging Cost Plus Contracts.

Here are the pros and cons for both:

FIXED PRICE CONTRACT

Advantages

• Client has peace of mind on the total cost of build
• Any increase in materials will not affect the client
• Client has a clearer idea of budget
• Client knows exactly what they can afford to build

Disadvantages

• Normally the builder allows for a higher profit margin
• If the builder does not budget appropriately the builder can come out at a loss
• Total build cost has the ability to exceed a Cost-Plus Contract

COST PLUS CONTRACT

Advantages

• The total price can come in cheaper than an existing Fixed Price Contract
• Builders are more likely to enter into an agreement with this contract
• Knowledge that the builder is not coming in at a loss
• Knowledge that you are only paying a certain percentage on top for the builder’s fees.

Disadvantages

• In some circumstances clients may have to cease building if they don’t budget correctly
• Rising material costs could potentially increase the cost of the build

If there is not enough profit margin in a Fixed Price Contract and the cost of materials soar then builders can go into financial ruin which is not good for their business or for their clients who want their job completed. Most building companies will encourage a Cost-Plus Contract however should their client push for a Fixed Price Contract they must allow for a healthy profit margin for unforeseen material increases.

At Gould Construction we are finding most of our clients are opting for a Cost-Plus Contract in today’s economic environment. If you are thinking of building and would like to discuss the differences in these contracts further call Tom Gould today on 0427 989 416 who would only be too happy to answer your questions.