In conjunction with selecting the project delivery system, the owner of a construction project must consider the mechanism used to determine the contract price and the contractor’s compensation. Generally speaking, there are four construction contract pricing methods.
First, under a fixed-price or stipulated-sum contract, the contractor agrees to perform a specific scope of work for a predetermined, fixed sum.
Second, under a cost-plus contract, the owner pays the contractor for the cost of the work plus an additional sum (often represented as a percentage of the project’s cost) for the contractor’s overhead and profit.
Third, under a cost-plus with guaranteed maximum price agreement, the owner agrees to pay cost-plus up to an agreed-upon maximum sum, beyond which the contractor bears the financial burden.
Fourth and finally, under a unit-pricing contract, the owner pays the contractor a fixed amount for certain units of material/labor used on the project, rather than paying a fixed total for all material/labor used on the project.
In our Law 101 posts, we define terms, phrases, or concepts with the goal of conveying core information in order to set the stage for more complex discussions.