Construction contracts are quite complex and can sometimes cause confusion among clients. There are many factors to consider when deciding whether to opt for a cost plus or stimulated sum contract for your next project. Each type of contract comes with its own advantages and disadvantages. Therefore, it is crucial to understand each contract and the circumstances that require each one. Knowing more about the distinct types of agreements will help you make the right decision the next time you enter into a contractual project agreement. Continue reading to learn the advantages and disadvantages of cost-plus and stipulated sum contracts, along with how to decide between the two.
What is a stipulated sum contract?
A stipulated sum contract, also called a lump sum or fixed fee contract, is a contractual agreement in which the contractor agrees to complete the project for a predetermined set price.
A stipulated sum contract binds the contractor to agree to be accountable for project execution at a predefined cost. The tenant has delegated the risk of project costs to the contractor. As a result, if the actual labor and material costs are higher than expected, the contractor’s profit would be lowered. In contrast, if the actual costs are lower, the contractor’s profit increases. Overall, in either case the price for the tenant stays the same. However, this does not mean that the entire amount must be paid in one single payment at the end of the contract. A stipulated sum contract may establish a total amount for the project while still allowing for periodic payments.
- Efficient timeline
- Less financial risk
- Set price will not change (Financing is easier)
The key benefit for clients is the contract’s predictability. The owner can expect the project to be finished on time and under budget. Clients face less financial risk with stipulated sum contracts because the contractor is accountable for any cost overruns. Furthermore, because the client does not need to track costs, supervision is minimal. Financing is simplified because payment structures for stipulated sum contracts can include periodic payments at defined iterations or as a percentage of completed work, streamlining accounts payable operations.
- It is difficult and costly to adjust your scope of work once construction has begun.
A stipulated sum contract requires that both parties agree on the scope of work. It is the only way for the contractor to offer an exact bid and execute the project as agreed-upon. It also means that these contracts cannot be too flexible. Furthermore, when a stipulated sum contract is agreed upon, the contractor assumes all the risk involved with bringing the project to completion. If the project goes over budget, the contractor handles any cost overruns.
Stipulated sum contracts are best for projects that have a sharp vision. These contracts are most effective for projects with finished plans, well-defined scopes and schedules, and comprehensive documentation of all evaluations and other pre-construction operations. These factors are critical in allowing parties to accurately estimate project expenses and offer the lump-sum amount.
What is a cost-plus contract?
A cost-plus contract, also known as a cost-reimbursement contract, compensates the contractor for all project expenses and a service charge. The added fee is there to offset the contractor’s profit. Cost-plus contracts differ from stipulated sum contracts in that there is no set fee. Instead, the tenant agrees to pay the cost of the work, including all trade subcontractor work, labor, materials, and equipment, plus an amount for the contractor’s overhead and profit. Moreover, if actual costs are lower than projected, the client saves and receives the difference. However, if the actual costs exceed the predicted expenses, the client must handle the cost overruns.
- Costs are decided by what the tenant requests.
- Better balance of responsibility managing costs between the contractor and the buyer
The advantage of a cost-plus contract is that the project should produce the original vision. The costs are determined by the client’s preferences and can be as high or low as desired. There is a more balance of responsibilities for cost management between the contractor and the client. Tenants are more involved in decisions such as tradespeople/subcontractors’ decision and material selection based on price and quality. You can secure the best quality supplies because you are paying for them directly, not through the contractor’s payment.
- More supervision is needed
- Can get expensive
- Can go over timeline
Cost-plus contracts are harder to track, and more supervision is needed. Although tenants have a greater say in major decisions, this means they will need to dedicate more time to the project, which may take time away from other job responsibilities. Additionally, there is also a greater danger of cost and timeline overruns because there is little incentive for the head contractor to ensure the accuracy of subcontractor quotes, keep on schedule, or costs low. If there are change orders due to a design mistake or lack of documentation, you are at risk of schedule and cost exposure. Overall, a cost-plus contract is not structured to drive the best value or savings for the client.
Cost-plus contracts are best suited for projects when it is hard to foresee the final expenses or when there is insufficient information to make a precise estimate due to incomplete final designs.
AURA’s integrated process and stipulated sum contract
An integrated approach is where strategy, design, and execution come together to bring your workplace vision to life through our unified team and holistic approach. At Aura, you get one entity, one contract, one seamless flow of communication and work from concept to completion. An integrated design/build approach cuts the bidding process and multiple contracts while putting the client under contract with one single entity that delivers a complete construction project. One firm will supply and oversee all construction processes up to completion. A fixed sum contract at AURA ensures cost control and transparency. Once the design is done, we implement a stipulated sum contract at the start of the construction phase. Until then, we provide progressive budgeting throughout the process, beginning with 15, 30, and 60 percent drawings.
Aura takes on the full design and construction risk. We agree with you on a budget, go out to subtrades to confirm that price through design, then take on the risk at the end of design guaranteeing the cost and schedule.
What you get when you select AURA
Aura takes on the full design and construction risk. We agree with you on a budget, go out to subtrades to confirm that price through design, then take on the risk at the end of design guaranteeing the cost and schedule. From the beginning you get a quote for the project cost and ensure the project budget/ costs are as presented. This drops surprises or cost overruns while allowing the client to keep the power and approve any material substitutions or construction changes. You will be kept informed of any substantial field changes from the original design, schedule issues that may affect the budget, staffing shortages, or material substitutions that may compromise the project’s design, timeline, or budget. Furthermore, AURA acts as a general contractor, hiring all skilled trade service providers needed and takes complete charge of the day-to-day construction operations and supervision of all subcontractors working on the project.
Contact Us to learn more about how our integrated design-build approach and stipulated sum contract can reduce risks associated with timing and budget.