Won't a Fixed-Price Contract be higher than a Cost-plus Estimate?

 

A builder providing a fixed price contract will have planned and mitigated risks, added risk premiums where appropriate and included reasonable profit margins - and should still be able to provide a price that is equal to a realistic estimate (they should be one and the same process).

 

A successful fixed-price builder is well-versed in cost management and is motivated to manage costs - the risks are ultimately his! On the other hand, if the cost-plus builder is wrong, it is not he who suffers (although his reputation will undoubtedly take a knock) and so why would be be so focussed upon worrying about cost management?

 

A building process is so long, and there are so many potential calamities on which to blame a cost increases, that by the end of the process it is extremely rare that there isn't project creep and increased costs. It is amazing how many clients forget the initial promises....it keeps the cost-plus industry alive!

 

 

 

Suggestions:

 

If you work with a cost plus builder, at least get a fixed price for the materials package - that should always be definable (especially if the foundations are excluded).

 

Get a fixed price for the sub-trades such as mechanical, electrical, drywall and insulation; they are also easily definable against plans and those contractors are typically well equipped to provide fixed-price.

 

By fixed pricing as much of the project as possible it means that the amount of room left in the project to slip in additional costs is reduced and thus more blatant (and thus less likely to occur). That doesn't mean that a fixed-price contract is the panacea either - read some of the other FAQ's to see why.

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