This form is a Construction Contract that may be executed with either a cost plus or fixed fee payment arrangement. The form contains the following additional subject matters and complies with the laws of the State of Tennessee: scope of work, work site, warranty and insurance.
Tennessee Construction Contract Cost Plus or Fixed Fee
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Key Concepts & Definitions
Construction Contract Cost Plus or Fixed Fee: In the US, these are two common types of payment agreements in construction contracts. A fixed fee contract stipulates a set amount that will cover all work performed by the contractor, offering a stable cost. In contrast, a cost plus contract covers the actual costs of materials and labor plus an additional fee that represents the contractors profit, which is usually a percentage of the project's costs.
Step-by-Step Guide to Choosing Between Cost Plus and Fixed Fee Contracts
- Evaluate Project Scope: Assess the complexity and duration of the project. Fixed fee is often favorable for projects with a well-defined scope, while cost plus may be better for projects where scope is subject to change.
- Analyze Financial Constraints: Consider your budget flexibility. Fixed fee contracts provide a predictable budget, whereas cost plus contracts can escalate if not tightly managed.
- Risk Assessment: Determine your risk tolerance as cost plus contracts might introduce budgetary uncertainty due to varying material costs and labor.
- Consult with Professionals: Engage with a construction attorney or a seasoned contractor who can provide insights based on past experiences and the specific nuances of your project.
Risk Analysis
- Budget Overruns: Cost plus contracts can lead to unexpected increases in costs, posing risks of budget overruns.
- Fixed Fee Limitations: Fixed fee contracts can lead to lower quality if the contractor cuts corners to stay within budget.
- Transparency and Trust: Cost plus contracts require high levels of transparency and trust between the contractor and client to ensure that costs are reported accurately.
Key Takeaways
Choosing the right type of construction contract depends heavily on the specific circumstances of the project, including its scope, duration, and the financial and risk preferences of the client. Both types of contracts have their advantages and challenges, and the choice should be made with a clear understanding of these factors.
Best Practices
- Detailed Documentation: Regardless of contract type, maintain thorough documentation of all costs, changes, and approvals.
- Clear Communication: Ensure continuous and clear communication between all parties involved to avoid misunderstandings and disputes.
- Rigorous Monitoring: Regularly monitor the cost and progress of the project to avoid surprises, particularly with cost plus contracts.
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FAQ
Firm Fixed Price (FFP) The price will be set on the buyer's request. A FFP should be used for a product or service that is a repeated process. As an example, a car manufacturer would enter into a FFP contract for a standard model car. The manufacturer knows what it takes to complete the car and the associated cost.
Disadvantages of cost-plus fixed-fee contracts may include: The final, overall cost may not be very clear at the beginning of negotiations. May require additional administration or oversight of the project to ensure that the contractor is factoring in the various cost factors.
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.
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 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.
Advantages of Cost-Plus Contract to the Contractor: (i) There is no risk of loss arising from changing prices, wrong estimates and underestimated quotation.(ii) It provides an automatic or ready escalation clause, so that increase in cost is automatically adjusted and recovered; (iii) There is no bargaining problem.
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%.
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.