Fixed Price vs. Cost Plus:
Fixed Price v Cost Plus
The question that we constantly get asked at Hellyar Design + Construction is whether your project should be under a fixed price or cost-plus contract. Whilst there are advantages and disadvantages for both options, it’s not a question that can be easily answered as it really factors down to your project and your individual circumstances. But we have the leg work and provided a snapshot of the two forms of contracts below.
So, what is a fixed price contract and cost-plus contract?
Generally, a fixed price contract is a lump sum contract that is agreed up front with your builder for the cost of your build, this may include provisional sums, prime sums and a list of exclusions, but the costs and scope are predetermined. A cost-plus contract generally includes an estimate from your builder of what they anticipate the cost of your build will be and the home owner pays for the direct and indirect costs with a pre-agreed mark up from your builder (this can be either a fixed component or a percentage of the build). A cost plus contract is a good option if you have a contract where it is difficult to determine the scope of the works and ultimately the costs.
We have summarized a high-level comparison of both forms of contracts below:
Fixed Price Contract
Advantages
Having a set price with a clear scope of work, this creates certainty on the scope of works and the costs;
It creates an incentive for builders to contain their costs; and
Administration tends to be minimal compared to a cost-plus contract.
Disadvantages
Generally, the risks associated with underestimating the costs lies with the builder;
There is less flexibility for scope alternations; and
As the costs are pre-determined, it may create an incentive for builders to cut corners to ensure that they fit within the initial costings.
Cost Plus Contract
Advantages
There is more flexibility in terms of the build process and the scope;
There is less incentive for builders to cut corners when there is a guaranteed profit mark up; and
Owners will have more visibility to monitor costs.
Disadvantages
There is a big reliance on builders being proactive in managing and tracking their expenses, if proper processes are not in place to manage and track expenses, this may result in budgets being exceeded and a lack of transparency; and
Uncertainty of costs in not having the scope and costs being pre-determined; and
Less incentive for builders to contain costs when the onus is on the owner to pay for the costs of the build.
If you have any questions or wish to discuss how Hellyar Design + Construct can assist with your project, please do not hesitate to reach out to our team at Hello@hellyar.com.au
