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What is the difference between ‘Fixed Price’ and ‘Cost Plus’ contracts, and which one is best for you?

April 20, 2017

 When engaging a builder for a construction project, there are generally two choices for how you approach the financial aspect of the contract. 

 

 

1. Fixed Price (Lump Sum)

 

The first is known as ‘fixed price’ or lump sum. Just as it sounds, this is an amount scoped and agreed up front. This is great if you are on a strict budget and want to manage costs. However, as the project unfolds there will inevitably be changes you will want to make along the way. To keep as close to this fixed price as possible, you will need to be disciplined about which changes you take on, as each variation will bring about an additional cost. Make sure you get as much detail as possible in your original quote to give you confidence in the final cost you can expect. 

 

There are two costs in your quote that you need to watch out for and get specifics on as soon as you can:

 

Prime costs (PCs) - allowances in the contract for the supply of items not yet finally selected such as fixtures and fittings eg. taps and lighting. These are generally nominated by the architect, but if this information is missing the builder may also suggest a figure. Ideally you will keep prime costs down to a minimum, and where necessary based on a quote of some sort to give you a sense of control.

 

Provisional sums - these are estimates in the builder’s contract for specific tasks where the exact final cost is unclear despite reasonable enquiries to investigate. An example of this is excavation, where the scope of work is uncertain until it actually begins. 

 

For these reasons, it is always advisable to have a contingency sum in your budget to be prepared for any unforeseen structural or regulatory issues that might arise.

 

 

2. Cost Plus

 

The other option for your project is called ‘cost plus’. Again, this is as it sounds: the exact costs incurred by the builder plus an agreed margin for overheads and management. The benefit of this approach is full visibility and control over what gets done, by whom and for how much. The majority of the risk for a cost plus project sits with the client as the final sum is less clear. However, for this reason, cost plus jobs may at times come in cheaper than fixed price projects as builders have a guaranteed margin so do not need to price to cover unforeseen circumstances. 

 

The project is still priced before starting, ideally to detailed plans to give as much visibility as possible. However, as the project unfolds, the key to success is regular and open lines of communication and budget updates.

 

Harmony Build regularly works with both pricing options - which you choose is a matter of preference. If you are unsure which is for you, we’d be happy to talk you through either in more detail with no obligation - just get in touch.

 

 

If you've found this useful, you might like our 10 Tips To Help You Choose A Better Builder

 

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