New Mexico Construction Contract Cost Plus or Fixed Fee
Description
Key Concepts & Definitions
When discussing construction contract cost plus or fixed fee models, it's important to understand the distinction:
- Cost Plus Contract: This model involves paying the contractor for all construction-related expenses plus a predetermined profit margin. Suitable for projects where the scope isn't clearly defined.
- Fixed Fee Contract: This contract type sets a total fixed price for all construction activities. It's preferable for projects with well-defined scopes and schedules.
Step-by-Step Guide to Choosing the Right Contract Type
- Evaluate Project Scope: Define the project's scope and specifications. For variable scope, a cost plus contract might be more suitable.
- Assess Financial Plans: Review your financial flexibility. A fixed fee contract might help in maintaining a strict budget.
- Consider Construction Risks: Identify potential risks that could affect cost and time. A cost plus contract can accommodate such uncertainties.
- Consult with Legal and Industry Experts: Get advice from professionals to choose the contract type that aligns with legal standards and industry practices.
Risk Analysis of Construction Contracts
Choosing between cost plus and fixed fee contracts involves several risks:
- Budget Overflows: Cost plus contracts can lead to unexpected expenses.
- Rigidity: Fixed fee contracts may not be as flexible in accommodating project scope changes or unexpected challenges.
- Project Delays: The motivation for timely completion may differ between the two contract types. Cost plus contracts may have less incentive for rapid completion.
Pros & Cons
Cost Plus Contracts:
- Pros: Flexibility in project changes; potentially better quality work as contractors are assured their costs are covered.
- Cons: Risk of budget overruns; less price certainty.
- Pros: Budget certainty; promotes efficiency and timely project completion.
- Cons: Rigidity in handling changes; potential for lower quality if a contractor cuts corners to stay within budget.
Best Practices
To ensure success regardless of the contract type, follow these best practices:
- Detailed Planning: Spend substantial time on planning and defining the scope.
- Clear Communication: Maintain open lines of communication throughout the project duration.
- Rigorous Documentation: Document all agreements, changes, and approvals to avoid disputes.
FAQ
What is the best contract type for a construction project?
It depends on the project's specific requirements and risk factors. Fixed fee contracts tend to be preferred when costs and project duration can be determined upfront, whereas cost plus contracts offer the flexibility required for complex projects with uncertain elements.
Summary
Understanding the difference between cost plus and fixed fee construction contracts is crucial for managing budgets, timelines, and project quality. Evaluating the project's scope, risks, and financial constraints are key factors in choosing the right contract type.
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FAQ
A fixed price contract sets a total price for all construction-related activities during a project. Many fixed price contracts include benefits for early termination and penalties for a late termination to give the contractors incentives to ensure the project is completed on time and within scope.
A fixed-price contract is a type of contract where the payment amount does not depend on resources used or time expended. This is opposed to a cost-plus contract, which is intended to cover the costs with additional profit made.
A cost plus percentage of cost contract or CPPC is a cost reimbursement contract containing some element that obligates the non-state entity to pay the contractor an amount, undetermined at the time the contract was made and to be incurred in the future, based on a percentage of future costs.
A Cost-Based Pricing Example Suppose that a company sells a product for $1, and that $1 includes all the costs that go into making and marketing the product. The company may then add a percentage on top of that $1 as the "plus" part of cost-plus pricing. That portion of the price is the company's profit.
A cost-plus contract, also known as a cost-reimbursement contract, is a form of contract wherein the contractor is paid for all of their construction-related expenses. Plus, the contractor is paid a specific agreed-upon amount for profit.
Cost Plus Contract Disadvantages For the buyer, the major disadvantage of this type of contract is the risk for paying much more than expected on materials. The contractor also has less incentive to be efficient since they will profit either way.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract's full price.
In the cost plus a percentage arrangement, the contractor bills the client for his direct costs for labor, materials, and subs, plus a percentage to cover his overhead and profit. Markups might range anywhere from 10% to 25%.