Before starting any project, homeowners are faced with many difficult decisions. One of them is to choose what kind of contract to enter into with the contractor. Fixed-price and time and material (T&M) agreements have both their strengths and weaknesses, depending on the job’s scope of work. Understanding those will help you choose what is right for yours.
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 his or her 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 breakup 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, then the contractor keeps the difference, making an extra profit.
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: For whatever reason, if the homeowner cannot initially define the scope of work, a T&M agreement will allow him or her 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 that 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 they proceed with the work.
Disadvantages
- Low Budgeting Control: The most significant disadvantage of a T&M agreement is the final costs can rise above the anticipated amount, and you won’t know until 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 will be required from the homeowner to ensure the contractor is delivering toward the scope agreed and that the correct amount of hours are being invoiced relative to the work completed.
For most of the work we perform we use the fixed price contract model. The only exceptions are design services and rot repair.
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