Bidding and Contracts

Cost Control: The most obvious and significant advantage of fixed-price is knowing the total project cost up-front. In cases of bank financing or tight budgets, this is the only way to ensure that the project won't exceed the budget (of course, there are lots of exceptions, see change orders). The open-ended nature of cost-plus contracts make them difficult for most owners to accept, particularly on larger projects.

Flexibility: If you want flexibility to change the design or materials used during the building process, cost-plus offers far more flexibility that fixed-price. Any change to a fixed-price contract must be hacost-plus, the contractor is happy to make a changes, since s/he's paid hourly regardless of the work performed.

Owner- contractor relationship: The type of contract can impact the relationship you have with the contractor. In a fixed-price contract, the owner and contractor have different goals; the owner would like the contractor to interpret the specifications generously, and include items that may not be directly specified. On the other hand, the contractor's interest is to comply with the specifications and not do unpaid "extras". In cost-plus, the contractor does whatever the owner asks. Essentially, cost-plus puts the contractor and owner on the same team, while fixed-price puts them on opposing teams.

Cost-effectiveness: The assurance of a price that cannot go higher makes fixed-price a popular form of contract, since most people dislike surprises (particularly those involving thousand of dollars of increased cost). However, it's worth taking a closer look to see if a fixed-price is really a good value.

From the contractor's standpoint, an estimate is just a guess, based on experience, of how long a project will take. Because projects often take longer than planned, s/he includes a contingency cost in his estimate. If the house should take four weeks to paint, s/he will probably add an extra week of contingency. Assuming his weekly rate was $1000., his actual estimate would be $4000., but his price to you would be $5000. That way, if the job does take a week longer than expected, s/he still gets paid for his time. If the job goes as planned (four weeks), you've paid for an extra week of time. In a cost-plus agreement, you would pay just $4000., but you could pay far more if it took a lot longer. In this way, a fixed-price contract is like an insurance policy- you pay extra up-front to protect yourself against potentially greater costs later.