A Comparison of Cost Plus and Fixed Price ContractsAssociation of Construction and Development
July 23, 2012 — 1,352 views
When conceptualizing a future construction contract, it's important for all parties involved to agree on how costs will be governed throughout the endeavor. Typically, this conversation revolves around whether to use a cost plus contract or a fixed price contract. The differences are listed below.
Cost plus contract
This type of agreement offers unique flexibility. Contractors are given more incentive to minimize costs or bonus money for assuming additional risk. Furthermore, these contracts contain specific clauses that provide advantages to the contractor for completing work within a certain time frame. For example, a savings clause gives the contractor a percentage of the money under the maximum cost, which makes him or her want to complete the project as quickly and efficiently as possible.
Fixed Price Contract
This formal contract provides a firm or adjustable price. This contract provides a price that is not subject to any adjustment due to errors on the part of the contractor. Fixed price contracts place the contractor with sole responsibility for all costs and resulting profit or loss. This option is best used when projects have stricter budgets.