Contract Options

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The Contract

The construction contract defines the business relationship between you and the contractor. There are several different types of contract, mainly having to do with how construction costs are paid. The contract forms are:

  • Fixed Price
  • Time and Materials
  • Fixed Fee

Each is briefly described below.

Fixed Price

In a fixed price contract we carefully review your plans and specifications and then give you a firm price to perform all construction work. Once you have accepted our proposal and we sign a contract, we are responsible to complete the work in accordance with the plans and specifications, regardless of the cost. In other words, we assume the risk of increases in the cost of labor and materials during construction./p>

The chief advantage to you is that you know from the outset what the project will cost, and you do not have the risk of cost overruns. That risk is ours. Another advantage to you is that the contractor has a strong incentive to work efficiently and complete the job on time.

The main disadvantage to you in a fixed price contract is that in preparing a bid a contractor must provide a cushion against cost increases and unforeseen circumstances

Time and Materials (T&M)

Under a T&M agreement we will prepare a general estimate of project costs, but it is not binding on us. The T&M contract provides that you will pay us for all direct costs of labor and materials, plus a percentage markup on these costs for our overhead and profit. The markup for your job is based on our estimate of the complexity and uniqueness of the job.

AAn advantage to you is that the contractor has no incentive to cut corners. A disadvantage is that you will want to examine the job records to satisfy yourself that material costs and labor time are accurate and reasonable. This is a time-consuming job and calls for some knowledge of construction methods and materials.

Another disadvantage is that the contractor does not have the same incentive to work efficiently and complete the project on time as he does under a fixed price contract. As with all construction projects, the contractor’s integrity is important.

And finally, you are not protected against increases in the cost of labor and materials as the job progresses. That risk is now yours, not the contractor’s.

Fixed Fee

This is a variant of the T&M contract. The difference is that instead of a markup on labor and materials, the contractor’s fee is a fixed dollar amount that is set forth in the contract. Your cost for the project is the actual costs of labor and materials, without a markup, plus the contractor’s fee.

This is probably the contract form in which the owner’s and contractor’s interests are most closely aligned. The contractor has no incentive to give you anything other than the level of quality you want, but does have an incentive to finish the job on or ahead of schedule. You still have a high degree of control, and changes can be made quickly.

However, as with T&M you still have the task of reviewing job records as well as the risk of cost increases.

A Note About Changes During Construction

Few projects get built precisely as they were planned. Owners, or their architect, have better ideas (or at least different ideas), contractors see ways to improve the project, or perhaps something was left out in the specifications.

How are changes handled?

If you have an architect, they will prepare a “change order”, which will include new drawings or specifications as appropriate. They will submit this to the contractor, who will respond with a cost increase or decrease to make the change. The architect will submit this to the owner to either accept or reject.

If you don’t have an architect the process is essentially the same, although less formal. You will tell us what change or changes you want to make and we will give you either a firm price to make it (under a fixed price contract) or an estimate to make it (under any other form of contract), and then the decision is up to you.

Have More Questions?

Please feel free to contact John P. Black Design/Build with any additional questions you may about Contract Options. We'll answer them to the best of our ability. We have over thirty years of experience in our business and we're here to help.