Fixed-price construction contracts are a popular type of contract used in the New Jersey construction market. They are designed to provide a high degree of certainty to both the client and the contractor regarding construction project costs.
What a fixed-price construction contract is
A fixed-price construction contract, also known as a lump-sum contract, is an agreement between a client and a contractor in which the contractor agrees to complete a construction project for a predetermined price. This fixed price is agreed upon before the construction project begins and remains unchanged throughout the project. Any changes to the project scope or design that occur during the construction process are typically managed through change orders, which supplement the original fixed price.
Advantages of fixed-price construction contracts
One of the primary advantages of fixed-price construction contracts is that they provide cost certainty to the client. The client knows the exact cost of the project before construction begins, which is useful for budgeting and financial planning.
Fixed-price contracts also reduce client risk as the contractor is responsible for any cost overruns. This encourages the contractor to complete the project on time and within budget.
Fixed-price contracts typically require the contractor to provide detailed estimates and breakdowns of costs, which can increase transparency and accountability. Client company shareholders and management can better carry out their duties with cost information at their disposal.
Potential disadvantages of fixed-price construction contracts
One of the top potential disadvantages of fixed-price contracts is that they offer limited flexibility. Any changes to the project scope or design may result in change orders, which will understandably increase the cost of the project.
In some cases, fixed-price contracts may not provide sufficient incentive for the contractor to complete the project efficiently. Since the contractor is not incentivized by additional compensation for completing the project ahead of schedule, there may be less motivation to do so. Adding early completion incentivization clauses may help overcome this potential drawback.
What to consider when using fixed-price construction contracts
The more clearly defined the project scope is, the more suitable a fixed-price contract will be because changes to the project scope can be costly under a fixed-price contract.
The contractor’s experience and track record in completing projects on time and within budget should be a top consideration when using a fixed-price contract. Furthermore, fixed-price contracts are more suitable for projects with a completed design as this reduces the risk of costly design changes during the construction process.
Fixed-price construction contracts provide cost certainty and reduce client risk while also enhancing transparency and accountability. Understanding the scope of your construction project can help you decide if a fixed-price arrangement is ideal for your needs.