Client Contracts

What type of Contract do you have? The agreement will determine how you manage your project. Residential contractors use three primary forms of Contract: Stipulated Sum, Cost Plus, and Cost-plus with A Guaranteed Maximum Price (GMP). Each has a different style and billing procedure.

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Stipulated Sum: The stipulated sum contract is a fixed price for a specific scope of work. This Contract should only be used where the scope of work is clearly defined. Where the scope is unclear, the cost will remain as an allowance and be adjusted when the scope is clarified. The critical element is the limited scope of work; scope adjustments require a corresponding price adjustment. The billing is based on a percentage complete since any savings or cost overruns remain our concern, not the owners.

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Cost-Plus: The cost-plus Contract is just that: the cost of the work plus a fee (either fixed or percentage, usually percentage). The original pricing is a budget based on a relatively defined but loose scope of work. The challenge here is to manage the cost and the owner's expectations. Throughout the process, you must keep the owner apprised of the anticipated final price. So, knowing where your budget stands concerning changes is critical in managing that expectation. The contractor's risk is lower, but if we do make an unbillable mistake, it is a one-way street, and we will not have an offsetting opportunity to make it up as we would in a stipulated sum contract. Billing is straightforward: the cost of the work plus the fee.

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Cost Plus with a GMP: Very similar to the cost-plus agreement, but it has the back-end kicker that we guarantee the maximum cost for a set scope (poorly defined) of work. This Contract is undesirable, but many clients want some form of up-end cost so they know the final price. You must manage this agreement as if it is a stipulated sum and billed as a Cost-plus agreement. The danger here is that if you do not control the GMP and go over, you absorb all of the cost and the Client has reaped all of the front-end benefits of any cost savings, it can be a death knell for a contractor.

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Management tip: Read the Contract and understand any nuances and why. You are managing that Contract, so understanding it is in your interest. Once it is read and understood, toss it in the bottom drawer and manage the project with excellent and honest business practices to never look at the Contract again. If you need to go back to the agreement, the situation rarely is headed in a winning direction for anyone.