Fixed Price vs Cost Plus Building Contracts
Posted on Jun 20, 2016 / Comments
In a previous Blog, I referred to the following continuum of building services: Production -> Build-On-Your-Lot -> Custom. Fixed Price building contracts are more commonly used at the Production end of the continuum whereas Cost Plus contracts are more common on the Custom end. You’re buying a product on one end and paying for a service on the other.
Both types of pricing usually include Allowances for Owner Selection of Finishes but more so on the Custom end where the Owner is provided virtually unlimited freedom of choice. Allowances for Custom Projects are primarily intended to help the Owner stay within an overall project budget.
The primary difference between Fixed Price and Cost Plus building contracts is that under the former, the Builder pockets any and all cost savings, whereas under the latter, the Owner benefits from all savings. Neither the Builder’s profit or any cost savings are disclosed to the Owner under a Fixed Price Contract whereas the Builder’s profit and all costs should be fully transparent to the Owner under a Cost Plus Contract as it is with this company.
A Hybrid of the two types of contracts is Cost Plus with a Maximum as also used by this company. This type provides the Owner the security of a maximum upside cost while still benefiting from any and all net cost savings. The Maximum price can be increased or decreased only by an agreed upon Change Order that changes what is being built or how it is built from how it was originally designed and specified.
