D

Contract types (PT1)-Fixed-Price, Cost-Plus, Unit-Price

Overview

  • Instructor revisits the broad family of contracts that govern the relationship between a General Contractor (GC) and a client.

  • Emphasized that the choice of contract type directly affects

    • risk allocation,

    • day-to-day construction management,

    • cash-flow predictability,

    • potential profit margin, and

    • the amount of administrative bandwidth required.

  • Contract menu introduced (today’s lecture covers the first three):

    • Fixed-Price / Lump-Sum

    • Cost-Plus (with three internal species: CPFF, CPIF, CPPC)

    • Unit-Price

    • Guaranteed Maximum Price (GMP) – only teased, details coming next

    • Design-Build – previously referenced, deeper dive later

    • Construction Management @ Risk (CMAR)

    • Time & Materials (T&M)

    • Master Service Agreements (MSA)

  • Reminder: a good estimator/project executive can take years to fully master contract nuances.

Fixed-Price (“Lump-Sum”) Contract

  • Definition
    GC agrees to deliver the entire scope for one predetermined amount; that figure only changes if client-initiated scope changes occur.

  • Core Mechanics / Key Clauses

    • Price frozen at Notice-to-Proceed; GC carries all scope, assumptions, means & methods.

    • Contractor’s statement to owner: “I own every line in the drawings & specs for X.”

    • Any unforeseen cost eats into the GC’s profit, not the client’s wallet.

  • Billing Structure

    • Milestone or percentage‐complete draws (e.g. 1\text{st} draw for mobilization, 50\% draw at rough-in, final upon substantial completion).

    • Simple invoices: “Pay \frac13 of X.”

  • Pros for Contractor

    • Potential to outperform estimate and capture extra margin (“keep the savings”).

    • Streamlined paperwork; client sees no cost breakdown (“secret recipe”).

    • Predictable revenue and cash flow planning.

  • Cons / Risks

    • GC absorbs 100\% of overruns from:
      • imperfect drawings,
      • hidden site conditions,
      • estimating errors,
      • schedule delays.

    • Change-order renegotiations can become combative; owner may demand to see cost backup, exposing margin.

    • Heavy pressure on field team to cut cost → potential quality erosion (“tripping over dollars to pick up pennies”).

    • Time-intensive, highly detailed upfront estimate required.

    • Reduced flexibility for design innovation once contract is signed.

  • When Ideal

    • Well-defined scopes, minimal ambiguity, drawings \approx “permit ready.”

    • GC confident in quantity take-off and market pricing.

Cost-Plus Contract

  • Definition Owner reimburses actual allowable costs plus a negotiated fee (profit). Fee can be:

    • CPFF: Cost + Fixed Fee

    • CPIF: Cost + Incentive Fee

    • CPPC: Cost + Percentage of Cost

  • Transparency Mandate
    Full open-book accounting: labor tickets, subcontractor invoices, material POs, GC overhead allocation, etc.

  • Pros

    • Greatly reduced risk of financial loss — all legitimate costs reimbursed.

    • Flexibility to accommodate scope evolution or unknown conditions without full contract rewrite.

    • Less temptation to sacrifice quality; field team not chasing a shrinking contingency.

    • If fee is a percentage (CPPC) profit grows as project dollar volume grows (e.g. change orders turn 1{,}000{,}000 job into 1{,}500{,}000; at 5\% fee GC earns extra 25{,}000).

  • Cons

    • Hefty administrative burden: daily cost coding, invoice compilation, lien-waiver packages.

    • Owner “cavity-search” scrutiny of every line item; disputes over what is allowable.

    • No path to exceed the fee % — little upside for extraordinary efficiency; can dampen cost-control incentive.

    • Requires constant owner & GC oversight, which inflates indirect costs.

  • Behavioral / Ethical Angle

    • World runs on incentives; if profit is capped, GC focus may naturally tilt toward schedule & quality over frugality.

    • Many GCs offer an eleventh-hour discount to convert Cost-Plus to Lump-Sum, trading transparency pain for certainty.

  • When Ideal

    • Projects with undefined or fluid scope, renovation with hidden conditions, emergency work after disasters.

Unit-Price Contract

  • Definition
    Work is broken into measurable units (cy of soil, sf of flooring, lf of wall). Contract lists \text{Unit Price} \times \text{Quantity} = \text{Payment}.
    Example: 1000\,\text{sf} \times \$100/\text{sf} = \$100{,}000.

  • Pros

    • Built-in mechanism for quantity growth or shrinkage without renegotiating whole agreement.

    • Bid preparation easier—GC doesn’t need perfect take-off day one.

    • Billing mirrors installed production; owner only pays for verified work in place → high accuracy, lower underpayment risk.

    • Clear pricing grid lowers probability of disputes (client knows rate for each extra sqft, cy, lf).

    • Useful on civil, horizontal, and utility projects where quantities vary widely.

  • Cons / Risks

    • Estimating accuracy still matters; if GC underestimates productivity or unit cost, margin erodes.

    • Cash-flow unpredictability: slow production or weather delays mean smaller draws.

    • Heavy field tracking: daily quantity surveys, third-party verification, paperwork → higher overhead.

    • Clients can challenge measured quantities ("99\,\text{sf} not 100\,\text{sf}").

    • Potential squeeze: if true cost climbs from 7 to 8 per sf but bid was 10 and GC promised client a deal, profit shrinks.

  • Risk Sharing

    • Some risk still splits: unanticipated subsurface rock, design errors, or owner-driven scope creep may trigger quantity spikes — negotiation skills critical.

  • When Ideal

    • Earthwork, paving, utility trenching, patch-and-repair scopes, or any project with uncertain quantities at award time.

Cross-Cutting Themes & Connections

  • Billing/Administration vs. Profit Potential trade-off:
    • Lump-Sum: low paperwork, high upside & high downside.
    • Cost-Plus: high paperwork, low downside, capped upside.
    • Unit-Price: moderate paperwork, shared upside/downside tied to quantities.

  • Disputes consume \text{time} + \text{money}; several pros/cons revolve around minimizing arguments and renegotiations.

  • Ethical dimension:
    • Transparency (Cost-Plus) vs. Proprietary Know-How (Lump-Sum).
    • Incentive structures guide human behavior; wise owners align contract type with desired contractor motivation.

  • Client Relationship Goal: regardless of contract, GC ultimately wants repeat work & referrals, influencing the decision of when to push for a change order vs. absorb cost.

  • Link to earlier lectures:
    • Design-Build & CMAR both often implemented under GMP or Cost-Plus structures — foreshadowing upcoming sections.
    • Budget-Schedule-Quality triangle (pick any two) resurfaces as the instructor discussed where the team focuses when cost risk is removed.

Numerical & Formula Highlights

  • All percentage examples written as LaTeX: 50\%, 60\%, 5\%.

  • Lump-Sum illustration: GC bids 1{,}000{,}000; if built for 900{,}000, extra 100{,}000 becomes pure margin.

  • Cost-Plus CPPC scenario: base scope 1{,}000{,}000 at 5\% fee \rightarrow 50{,}000 profit; scope grows +500,000 \rightarrow profit becomes 75,000.

  • Unit-Price flooring example: 10,000\,\text{sf} total; client switches all to higher grade at 20/\text{sf} \rightarrow contract adjusts to 200,000 without renegotiation.

Practical Take-Aways

  • Know thy drawings & specs before committing to Lump-Sum — ignorance transfers risk to you.

  • Document obsessively on Cost-Plus; digital cost-coding systems (ERP, Procore, CMiC) become indispensable.

  • Measure daily on Unit-Price; poor quantity tracking is a stealth profit killer.

  • Selecting the wrong contract type can bankrupt a GC or alienate an owner; matching project characteristics to contract vehicle is a core competency for construction professionals.