THE ADVANTAGE OF A FIXED PRICE CONTRACT
When engaging a builder for your home renovation there are 2 types of contract that you may enter into, a ‘fixed price contract’ or a ‘cost plus contract’
COST-PLUS CONTRACTS
A cost-plus contract is one where the builder undertakes to build the house for whatever it costs plus a margin of a stated percentage. Cost- plus contracts are loved by government departments, who believe that they give the public the best possible and most cost-effective deal.
What lies behind that is the fundamental drawback to cost-plus contracts: the builder has no incentive to buy or work as cost effectively as possible. Why bother? However, much it costs, the builder is going to get everything back together with the agreed percentage. Cost-plus contracts may seem when you first look at them to be cheaper than the alternatives but they never work out that way.
FIXED PRICE CONTRACTS
The price is fixed and the builder has to do it for that amount of money. When a builder quotes a firm price for any part of the project that is a commitment to build it for that amount of money. If it costs less, the builder pockets the difference.
IF IT COSTS MORE, THE BUILDER LOSES MONEY.
The builder does have to do a fair amount of work up front to calculate the exact cost of the project and it is not unusual for the builder to spend days even weeks calculating the cost of the build. He needs to get it right or he could loose significant amounts of money so he needs to calculate accurately the every brick, nail and piece of timer and the time taken to do the build and add it all up.
SO WHAT IS THE ADVANTAGE TO THE CLIENT OF FIXED PRICE CONTRACT?
-The client knows up front exactly how much the build is going to cost and will have the necessary funds put aside for the build.
-The banks commonly want a fixed price contract these days in order to release the funds
-The builder will have a better relationship with the client as they won’t need to scrutinise every invoice and the cost of every brick and every screw to ensure they are getting absolutely best value from the builder, and as commonly found the Client/Builder relationship deteriorates at the end of a cost plus contract as the cost of the build starts to blow out.
-The builder is incentivised to price the job accurately or he could loose significant amount of money, the builder doing a cost plus contract won’t put the time into pricing the project accurately as they have nothing to loose, there is significant risk here of the job not costing what was originally estimated, most cost plus contracts blow out in cost
At the end of the day the client is after value for money, this is not about driving the price down and cutting the builder’s margin to the bone. The best projects are those where there is a good working relationship between builder and customer. If you agree to pay a fair price, you can expect a good job. If you try to get the house built for less than it should really cost, expect to get what you’ve paid for.
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