The largest commercial construction jobs are agreed upon under a cost-plus rather than a fixed price contract, according to the "Daily Journal of Commerce." Which contract you use can have a huge impact on your costs and profit margin.
The main difference in a cost-plus versus a fixed price contract is the budget. Cost-plus contracts have no set spending limit, the contractor purchases the materials and receives reimbursement plus a fee. Fixed-pricing sets a specific dollar amount for a project.
Cost-plus contracts usually result in higher quality projects than ones under a fixed-price, because contractors do not have to worry about the price of materials reducing their profit margins.
On the other hand, fixed-pricing means contractors will have to watch their budget and purchase the most cost-effective materials, according to AllBusiness.
Cost-plus contracts are a poor choice for someone on a budget because the actual cost is hard to predict -- you can counteract this somewhat by requiring a guaranteed maximum cost, suggests Financial Web. Fixed-price contracts are simple to enforce, while cost-plus requires constant supervision.
- signing a contract image by William Berry from Fotolia.com