Before starting any project, homeowners are faced with many difficult decisions. One of them is choosing what kind of contract to enter into with the contractor. Fixed-price and time and materials (T&M) agreements have both their strengths and weaknesses, depending on the job’s scope of work. Understanding those differences will help you choose what is right for your project.
FIXED-PRICE CONTRACT
In fixed-price agreements, also known as quotes, the contractor is responsible for completing the project within the agreed-upon fixed cost set forth in the contract.
Advantages
- Ease of management: Fixed-price arrangements are fairly easy to manage, and payments to the contractor can be based on a pre-arranged percentage of completed work.
- Predictability: The agreed fixed price protects the homeowner from delays, incidentals, and liability during the project.
- Collaboration: This arrangement generally fosters a higher degree of collaboration, as the contractor protects their margins through tight project management to ensure scope compliance.
- Clear scope of work: A written quote should clearly state line by line the jobs to be performed as well as the timeline. Any discrepancy can be discussed before finalizing the contract.
Disadvantages
- Closed book: A fixed-price contract is generally a closed-book arrangement, so the contractor does not have to report a detailed cost breakdown of labor and materials to the owner.
- Lack of flexibility: Owners must understand that the lump-sum nature is fairly inflexible. They are responsible for any unforeseen changes initiated by them or that are beyond the contractor’s control.
- Reimbursement is not an option: If the contractor completes the project under the fixed total cost, the contractor keeps the difference, making an extra profit.
TIME AND MATERIALS CONTRACT
For a T&M job, the contractor provides you an hourly rate of labor and your cost will be determined by the price of materials plus the hours of labor. Usually, you are billed weekly with this kind of agreement.
Advantages
- Design on the go: If the homeowner cannot initially define the scope of work, a T&M agreement allows them to develop it as the work is completed.
- Flexibility: For fast-tracked projects, T&M contracts allow an owner to have more flexibility to change scope, designs, and materials as the project proceeds.
- Urgency: If you need an emergency repair, you probably want to hire someone who can show up right away and take care of the problem. Although they can give a rough estimate at the beginning, things can rapidly change as work proceeds.
Disadvantages
- Low budgeting control: The most significant disadvantage of a T&M agreement is that final costs can rise above the anticipated amount, and you may not know until it is too late. With a T&M approach, you own the risk of not knowing the final cost of the project.
- Deep involvement: Extra hands-on management is required from the homeowner to ensure the contractor is delivering toward the agreed scope and that the correct amount of hours are being invoiced relative to the work completed.
Which Contract Type Does Polli Construction Use?
For most of the work we perform, we use the fixed-price contract model. The only exceptions are design services and rot repair.