Fixed Price vs Cost Plus

In construction projects, there are two main types of contracts: fixed price and cost plus contracts. Both of these contracts have their own unique characteristics and are used in different situations.

Fixed Price Contracts

A fixed price contract, also known as a lump-sum contract, is an agreement where the contractor agrees to complete a project for a specified price. This means that the contractor takes on the risk of any cost overruns. The project owner has the certainty of a fixed cost for the project. Fixed price contracts are often used for smaller construction projects where the scope of work is well defined.

Cost Plus Contracts

A cost plus contract is an agreement where the contractor is reimbursed for the cost of the work, plus a fee or percentage for overhead and profit. This means that the project owner assumes more risk in a cost plus contract, but also has more control over the construction process. Cost plus contracts are often used for larger construction projects where the scope of work is not well defined, or where changes to the scope of work are expected.

Key Differences

The main difference between fixed price and cost plus contracts is how the project cost is determined. In a fixed price contract, the project cost is predetermined and agreed upon before work begins. In a cost plus contract, the project cost is based on the actual cost of the work plus a fee or percentage for overhead and profit.

Another key difference is the level of risk assumed by each party. In a fixed price contract, the contractor assumes the risk of any cost overruns. In a cost plus contract, both the contractor and the project owner assume some of the risk. The project owner assumes the risk of cost overruns, while the contractor assumes the risk of not being fully reimbursed for actual costs.

Which Contract is Right for Your Project?

The choice between a fixed price and a cost plus contract depends on the specific needs of the project and the priorities of the project owner. If the scope of work is well defined and changes are unlikely, a fixed price contract may be the best option. If there is a higher degree of uncertainty, or if changes to the scope of work are likely, a cost plus contract may provide more flexibility.

In conclusion, fixed price and cost plus contracts are two different types of contracts used in construction projects. Understanding the differences between these contracts can help project owners choose the best contract for their specific needs.