There are two distinctive types of contracts that you should be aware of before signing on the dotted lines yourself. There are Fixed Price contracts and Cost Plus contracts. Each has its own set of unique pros and cons that are worthy of investigation to make sure you’ve selected the right choice for your construction project. I will cover the two types below so you can consider the right choice for your build.
A fixed-price contract is when an agreed amount for the scope is established prior to work commencing. This means that clients can prepare their finances before the construction begins and know what is scheduled for progress payments and when. The contractor is paid a set fee regardless of the final cost of the project.
If a builder underestimates labour or materials during the quoting stage then they will have to absorb these costs as a loss during the build. This can result in cheaper alternative materials being substituted during construction to keep the builder’s costs on budget.
If there have been any overestimates for the project then the residual goes into the builder’s pocket. This is another reason to make sure you’re getting a reliable well research accurate costing of your build.
It’s not uncommon for fixed price contracts to have provisional sum allowances and prime cost allowances where the price can’t be determined prior to signing the contract, these costs are likely to inflate during the build. In this situation, it’s recommended to have a contingency in the budget to account for such items.
In contrast to a fixed-price contract, a cost-plus contract is where the final cost is not determined at the time of contract signing. It evolves as the cost of the build unfolds depending on the resources required for the build and is charged to the client plus a profit margin. There is also the builder’s overhead that are charged in each claim.
The Plus (builders margin %) is agreed upon and outlined in the contract along with the hourly rates for labour hire.
A builder can get an estimate for the proposed works prior to signing the contract that will operate as a guide for the clients. But any increase or decrease in cost is charged to the client accordingly. The benefit is the owner will have more knowledge of the total expenditure and decisions while the builder will have nearly no risk of costs overrunning.
There is more frequent invoicing for cost-plus contracts, it’s up to the client and builder to establish the frequency, but fortnightly or monthly are recommended. There is a lot more administration for the builder and a high degree of fastidious cost tracking required. It’s the builder’s responsibility to have records of all costs associated with the build on file for retrieval at the request of the client.
As its the builder’s responsibility to pay for materials and trades following their terms, this can leave the builder financing the progress of the build before being able to claim the expense from the client. It’s important that the builder has the funds to manage these cash flow rhythms.
For more of our latest projects, follow along on instagram at @lrccustombuilders. Here you can see projects come to life every step of the way.
A nice blend of old and new.
barwon heads, VIC