Read these tips for creating a flat rate contract: GMP projects can get started faster because they are easier to finance. Lenders appreciate knowing the maximum amount of a project from the beginning. There is also room for negotiation with owners to share cost savings with contractors, encourage efficiency and move faster. As mentioned earlier, fixed-rate contracts aren`t always sunshine and rainbows. Here are some of the main drawbacks. The above points underline the fact that the fixing of the fixed price in the contractual document of the lump sum contract is far from permanent and is very subject to change and modification. Undeniably, cost certainty is a big issue with any project, and fixed-rate contracts are no different. Work associated with fixed amounts can cause problems with the project schedule, especially if it is implemented later in the project. This can also result in changes that require formal change orders. For this reason, it is important that the terms of a lump sum describe in detail how to deal with interim amounts and what limitations there are associated changes. The contractor defends its margins through tight project management and good communication with the owner to ensure that the scope is respected.
The owner wants to get as much work out of the money spent, while the entrepreneur wants to make maximum profit with the money he receives. This can lead to a conflict of interest. It is important that the work is clearly defined, that site conditions are explained in detail and that specifications are clearly defined. Failure to do so can lead to disputes that could easily have been avoided if the contract had been thoroughly reviewed from the outset. Related: What is a subcontractor and how do they differ from contractors? Other contracts with more fluid pricing can be difficult to obtain financing. In the case of indeterminate contracts, lenders are concerned about excessive hours of work and increasing unforeseen events. As with Cost-Plus and T&M contracts, unit price contracts benefit project owners if they have a general idea of the project to be carried out, but the concrete planning is not yet complete. For example, you can set a price in square feet for flooring and installation, although you don`t know exactly how many square feet of flooring you need to cover. Because you know roughly how much materials and labor would cost, you can set a unit price for this and other aspects of a construction project. Entrepreneurs can master good approximations of the costs and revenues of each phase.
Owners and contractors can adjust the project as needed without having to submit change orders and renegotiate prices as they would with a fixed-rate contract. A notable shortcoming is that there is a significant risk of cost overruns, as these contracts generally do not have a unit threshold. Even though lump sum contracts are considered ideal for small construction projects, they can lead to disputes and claims arising from contractual agreements. The most contentious issues are: Some projects have to submit claims for payment using unit quantities and unit prices. In such a case, the contractor may make an unbalanced bid by increasing the unit prices of items required at the beginning of the construction process, such as transportation and insurance, and lowering the unit price of materials to be used later. He understands and accepts that contractors often add costs when pricing a fixed contract. The owners know that the contractor is taking the risk of the project, so they are willing to spend a little more to calm down. This makes lump sum contracts more expensive than other contract formats. The contractor evaluates the documentation and calculates how much labor and materials will cost. It takes into account the more expensive cement requested by the owner and includes a buffer amount to account for unexpected expenses. It then adds another amount to cover overhead and profits to the final project estimate. The client accepts the price and the lump sum contract: it is important that contracts include an effective modification and evaluation process.
Time and material contracts require additional paperwork compared to lump-sum contracts, as labor costs must be accurately recorded. It is important to understand that these contracts are not very transparent. The owner is never really sure where the costs are and how much the contractor earns from the project. Entrepreneurs will, of course, hide their margins, and this kind of secrecy follows the payment chain. At any point in the chain, this climate of mistrust can lead to disputes. It`s not all rosy for homeowners in a cost-plus system. This agreement does not encourage a contractor to get the best price for materials. On the contrary.