What are the pros and cons of fixed-price vs. cost-plus contracts in construction?

2 Cost-plus contracts

A cost-plus contract, also known as a reimbursement contract, is a contract where the owner agrees to pay the contractor for the actual costs of the project plus a fee or a percentage of the costs. The contractor is responsible for tracking and reporting the costs and risks of the project and charging the owner accordingly. The contractor bears the risk of underestimating the costs and losing profit, but also benefits from being able to adjust the scope and schedule of the project as needed. The owner benefits from having more control and flexibility over the project and paying for the actual work done. However, the owner also faces the risk of cost overruns, delays, or changes in the project and may have to monitor the contractor closely.

3 Factors to consider

Choosing between fixed-price and cost-plus contracts depends on several factors, such as the size, complexity, and duration of the project, the level of uncertainty and risk involved, the availability and reliability of information and resources, and the preferences and objectives of the owner and the contractor. Generally, fixed-price contracts are more suitable for smaller, simpler, and shorter projects with well-defined and stable requirements and low risk. Cost-plus contracts are more suitable for larger, more complex, and longer projects with unclear or changing requirements and high risk.

4 Advantages and disadvantages

Both fixed-price and cost-plus contracts have advantages and disadvantages for the owner and the contractor. Fixed-price contracts offer a clear and predictable budget, no extra costs, and an incentive for the contractor to finish on time and on budget. However, they can lead to higher prices or lower quality, less control and flexibility, more changes and variations, and more risk for the contractor. Cost-plus contracts, on the other hand, can lead to lower prices or higher quality, more control and flexibility, less changes and variations, and less risk for the contractor. However, they can result in an uncertain and variable budget, extra costs, less incentive for the contractor to finish on time and on budget, more supervision and administration needed, and more disputes and claims.

5 Best practices

To make the most of the contract type you choose, it is important to define the scope, schedule, and budget of the project clearly and realistically. Open and honest communication and negotiation with the other party is also essential. Additionally, you should document and manage the changes and variations in the project, as well as monitor and control the costs and risks. Furthermore, you should review and evaluate the performance and quality of the project, and resolve any issues or conflicts promptly and fairly.