The building business: Fixed Price vs Cost Plus

Fixed price contracts in construction have several potential benefits over cost-plus contracts or other pricing methods. However, the best choice depends on the specific circumstances of the project. Here's why you might prefer a fixed price contract:

Budget Certainty: The most significant advantage is budget certainty. With a fixed price contract, you know upfront exactly how much the project will cost. This allows for more accurate budgeting and financial planning.

Reduced Risk: In a fixed price contract, the contractor assumes the risk of cost overruns. If the project ends up costing more than expected, it's the contractor, not the client, who is typically responsible for the additional costs.

Incentive for Efficiency: Contractors under a fixed price contract have an incentive to work efficiently to keep their costs down. If they can complete the work under budget, they keep the savings, leading to potentially quicker project completion.

Simpler Administration: Fixed price contracts can simplify project administration and management. There's less need to closely scrutinize invoices to ensure the costs are valid, as you might need to with a cost-plus contract.

However, it's important to note that fixed price contracts also have potential downsides. They typically require a very detailed and accurate project scope to be defined upfront, and changes can result in expensive change orders. If the scope of work isn't well defined, the contractor may add a substantial contingency to the price to account for potential risks, which can make the project more expensive.

Therefore, while fixed price contracts can offer several advantages, it's crucial to ensure they are the right fit for the specifics of your project and to work closely with a trusted contractor.