• Duane C. Barney

Contracts, Boring but necessary

Which type of contract, we will explore the three most common types and the pros and cons of each

1, The most common and expected form of contract is the stipulated sum, or fixed price contract

Pro: This form of contract provides the client a specific price for a defined scope of work and work best when the scope of work can be clearly detailed. It gives the client pricing assurance regarding the known scope in the decision-making process allowing for informed decisions regarding changes down the road and a basis for financing if required. Billing is also easier as it can be made as a percentage complete for specified costs.

Con: Since all of the risk for the project is assumed by the contractor the estimated cost may be higher than the actual to account for the risk assumed.

2. The second commonly used for of contract is cost plus a percentage.

Typically, the contractor will prepare a budget based on the drawings, but their contract will not commit themselves to this amount. The actual point of contract negotiation is determining the percentage that will be used as the contractor’s fee for services based on the actual cost of the work.

Pro: The client pays only for the actual cost of services provided, they are presented with multiple bids for each trade and assist in the decision-making process as to which trade will be employed. Since the price is based on the cost of the work, there are no change orders. There may be budgeting pricing for decision making purposes only.

Con: for the client there is more involvement in the process thus more time may be required. The Billing process is far more cumbersome for both the client and the contractor. Since the billing is based on the actual cost the contractor is obligated to track and document those costs and it is prudent of the owner to review those costs presented. The other negative is, if the client selects a much nicer version of appliance then the contractor gets a larger fee for the work, but this can go both ways.

3. The third type is a slight hybrid which is a cost plus a fixed fee.

The starting process for this form is the same as the cost plus but in the case the contractor guarantees their fee for services, regardless of the cost, except for substantial changes to the work.

Pro: The client receives a fixed price on what otherwise was a variable and all the other benefits of a cost-plus agreement. Contractor is motivated to move forward since a project that drags on will not generate additional revenue.

Con: Same down falls as the cost-plus arrangement plus if the project is delayed through no fault of the contractor they will become completely unmotivated to finish since they are not making but only spending money.

No matter which form of contract that is used the best approach is to work as a team and not advisories, Let the contract define how billing is processes and put it in a drawer with the hope it will never be needed again.

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