Choosing between a fixed-price vs cost-plus contract in construction depends on a few factors, all of which require careful consideration.

First, let’s look at what each type of contract entails.

Fixed-Price Contract

A fixed-price contract is an agreement between two parties where a very defined work scope is created, along with a set price to complete that work. To many homeowners, this pricing strategy is ideal as it gives them comfort moving forward with the project knowing what the final price will be. In order to create a fixed price, all the variables need to be ironed out, as this will dictate the overall cost. 

These variables may include site preparation and topography, interior & exterior finishing, building and mechanical systems, underground services, architectural design, engineering, municipality regulations, etc. 

Fixed-price contracts work great for smaller projects where there are fewer variables and decisions can easily be made. In order to compensate for any variations in the project, contractors typically add higher margins to these projects to protect themselves against price increases and unknown issues that may arise.

If you take into account the planning phase needed to estimate the project properly and the higher margins that the contractor needs to charge to mitigate his liability, the fixed-price may actually come out more expensive than a cost-plus project.

Cost Plus Contract

Cost-plus contracts are agreements where the owner pays for the contractors actual costs for labour, materials, subcontracted services and other project-specific expenses, plus a fee to cover the contractors time managing and coordinating all aspects of the project. 

One of the benefits of a cost-plus contract for the owner is the level of transparency presented. The owner will be able to see exactly what was purchased, time on site for all sub-trades and what was accomplished during that time. 

Another benefit is that it’s a lot easier to make changes during the construction phase. Although changes may be easier, owners must still be cognizant of the fact that every small change in the project will affect the overall cost. 

Cost-plus contracts work great for larger projects where a lot of the variables are unknown and cannot be easily predicted. In this strategy, a specific budget price can be set along with KPIs during the construction process to make sure the project will finish in and around the set budget. 

There are many factors when deciding between fixed-price or cost-plus and typically, these factors can be narrowed down to project size and scale of the work scope when deciding which pricing method to move forward with. 

What Do We Recommend?

Each project is different, and we work with our clients to determine which strategy will work best for their project. 

When to choose a fixed-price contract

If you have a smaller project with fewer variables, and the cost associated with the project can easily be predicted, we recommend moving forward with a fixed-price contract. 

If the project size and scale increases and the client still wants a fixed-price, we will offer our services to help plan and facilitate decision making and offer further investigation and research to finalize the price. 

When to choose a cost-plus contract

When the project size and scale exceed the ability to estimate the project accurately, we recommend moving forward with a cost-plus contract along with a set budget and KPIs throughout construction. 

If you’re debating a fixed-price vs cost-plus contract, or you have any questions regarding pricing for your next home project, send us a message or call us at 250-718-4969.