In residential construction and remodeling, there are two basic types of contracts most often used by contractors.
These are commonly referred to as “Fixed Price” and “Time and Materials.”
Each has their pros and cons so it’s important to know the differences of each before starting your next project.
A Fixed Price contract is one in which the contractor presents a proposal with a specific price they charge to complete the job.
This typically encompasses everything necessary to complete it, and possibly some allowances for decisions not yet made, such as bath fixtures or tile selections (See our blog on Allowances).
For this type of proposal, an accurate and detailed Scope of Work (see blog) is essential for communication so you know exactly what you are getting for the investment cost so there are no gray areas. As long as there are no scope changes or requirements, this is the guaranteed price you’ll pay at the end.
- Easily work within a budget and forecast costs
- Clear process and outline
- Clear view of how much you’ll be paying at the end of the job
- Upfront planning irons out issues and problems beforehand.
- Requires time for upfront planning
TIME AND MATERIALS
In this form of pricing, the customer or client pays for the exact cost of the work based on an hourly rate and cost of materials.
This is common for many service type businesses such as a plumber, HVAC tech or handyman.
Often, companies will have minimum rates to cover the costs associated with smaller jobs, which can more easily be distributed over larger ones.
“Time and Materials” pricing is sometimes used in a “Cost Plus” scenario where there is a markup percentage applied to the costs to cover the company’s overhead and profit. This number is specific to the business and varies accordingly. This is often in new home construction and in situations where the design isn’t 100% complete.
- Customers pay for exactly the work that is done
- Flexible for projects where the scope changes frequently or conditions are unknown.
- Difficult to project final cost and schedule
- Can easily drift out of scope and quickly rise up in price if not communicated
- Gray areas as to what is billable time if a contract is not in place.