What Is the Difference Between a Fixed Price Contract & a Cost-Plus Contract?

Fixed price contracts have a set budget.

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.

Features

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.

Benefits

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.

Considerations

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.

References

• Daily Journal of Commerce: 'Cost-plus' contracts' true costs not obvious
• Association of the Wall and Ceiling Industry: Cost-Plus Contracts Can be a Minus
• Financial Web: Pros and Cons of a Cost-Plus Contract
• AllBusiness: The real value of cost-plus