Different Types of Construction Contracts

Firm Fixed-Price Contract

The cost of the item or service being purchased is fixed in this form of contract,
regardless of how long it takes to produce the item, finish the service, or how much the needed
supplies cost. A fixed-price contract's price can only vary if it is expressly specified in the contract
that it may do so if the final product or service is defective, or to account for inflation if the contract
will be valid for several years. As a result, many fixed-price contracts expire if not completed within
a specific time frame. A fixed-price contract is one in which the contractor bears complete
responsibility for profit or loss for the entire term of the contract, along with all extensions, subject
to any contractual provisions enabling price modification.

Advantages

 A fixed-price contract helps the buyer to budget more effectively. Because the customer
knows precisely how much the goods or service will cost, the buyer can prepare for it
precisely in their budget. And, on occasion, the market drives up the price of a certain
product or service. When this occurs, the buyer benefits from having a fixed-price contract.
 Allowing your firm to retain control over the amount due.
 Maintaining control over the contract's maximum value.
 Managing the expense of recruiting outside of the firm.
 Fixed-price contracts are also an effective technique for merchants to market and get
new consumers.

Disadvantages

 A fixed pricing contract gives a consumer more certainty regarding future service or
goods expenses, but it does come at a cost. Sellers may know they're taking a risk by
having a set price, so they'll charge more than they would usually for a fluid pricing. If
the price of a service or item falls unexpectedly, the vendor suffers and the customer
benefits.
 The issue with fixed pricing is that it does not allow for modifications once you start
delivering products or services and discover your cost basis is greater than planned.
 When the cost of the service or items skyrockets, the buyer will be unable to fulfill the
contract. This implies the seller must accept the loss and determine their legal options.

Fixed-Price Contract with Economic Price Adjustment

When there is substantial question about the stability of market or labor
circumstances over a lengthy term of contract performance, a fixed-price contract with
economic price adjustment is utilized. Contingencies that would normally be included in the
contract price should be specified and covered clearly in the contract. Price changes based on
 established prices should typically be limited to industry-wide contingencies. Price changes
based on labor and material expenses should be reserved for unforeseen circumstances outside
the service provider's control.
Advantages

 Under some conditions, a fixed-price contract with economic price adjustment allows
for price adjustments, either positive or negative.
 When such a contract is in place, price changes can be made when market swings occur
that are beyond the seller's control.
 Price rises are not permitted to exceed the price ceiling, which must be fair and agreed
upon by both parties prior to the start of work. There should also be mechanisms in
place for price reductions when rates fall below specific contract-defined levels.
Disadvantages

 Contingencies must be in place to account for changing market conditions over the term
of the contract.
 Can be utilized only if the contracting officer decides that it is essential either to
safeguard the contractor and the Government from major fluctuations in labor or
material costs or to provide for contract price adjustment in the event that the
contractor's set rates change.

Fixed Price Incentive (FPI) Contract

This contract defines a target cost, a target profit, and a target price that is the sum of
the target cost and profit. The contract also includes a price ceiling (or ceiling price), but not a
profit ceiling or floor, which is the maximum amount that can be paid to the contractor,
excluding any adjustments allowed under other contract provisions.

Advantages

 The seller will receive a bonus for finishing early or surpassing other metrics agreed
upon in advance, such as quality. Incentives can be win-win for buyer and seller.
 They help motivate the seller to finish faster, which is good for the buyer, and also
reduce the risk that the seller will work longer or require more time to complete.
 It promotes better lines of communication during the project.

Disadvantages

 It requires extra negotiation time.

 It can change the priority of the contract.
 It increases the risk that a dispute will occur.
 It can be difficult to determine what a fair incentive target happens to be.
Cost Sharing (CS) Contract
Cost-sharing contracts pay the contractor only a share of the project expenses, with no additional
fees. These are generally employed when negotiating with a private firm for research and
development and the company in question will gain in other ways from the deal. It is a cost-
reimbursement contract in which the contractor receives no fee and is reimbursed solely for a part
of its permissible expenses that has been agreed upon.

Cost Reimbursement Contract

It is also known as cost-plus contracts, are frequently utilized for research initiatives,
construction projects, and other endeavors that include the purchase of resources. The
contractual party agrees to compensate the contractor for the entire cost of supplies since the
cost of these materials is unknown at the time the contract is written.

Advantages
The following are the advantages of a cost-plus contract for the buyer:

 Higher quality since the contractor has an incentive to utilize the best materials and
labor.
 There is less of a risk that the project will be overbid.
 Often less expensive than a fixed-price contract since contractors do not need to charge
a higher price to offset the risk of higher-than-expected material costs.
Contractor advantages include:

 The capacity to take on a project with an undefined design or scope of labor.

 The possibility of increased profit through performance incentives

Disadvantages

 The main downside of this form of contract for the customer is the possibility of
spending significantly more than planned for materials.
 The contractor also has less motivation to be efficient because they will earn regardless
of efficiency.
 To guarantee that the contractor complies to cost limits and other austerity measures,
more administration and monitoring are required.
Cost-Plus-Incentive-Fee contract
It is a type of cost-reimbursement contract in which the initially agreed charge is later
modified by a formula depending on the ratio of total permitted costs to total target
costs. A goal cost, a target fee, minimum and maximum fees, and a fee adjustment
mechanism are all specified in this contract type. Following contract completion, the fee
owed to the contractor is calculated using the formula.

Advantages
- It is good for the seller (or the one who's doing the project): Unless the ceiling price for
the project is exceeded, there is no way that the seller can lose money on the project,
even if it's over budget. Note though that the more over-budget the project is, the less
profitable it is for the seller.

- It is good for the buyer (or the party who's contracting out the project): The total price
that the buyer will pay for the project will never exceed the ceiling price, and, if the
buyer/seller ratio is fair, then the buyer might be getting a good deal, even if the project
ends up costing more than planned.

Time and Materials Contract

A time and materials contract, in essence, specifies how the employer will compensate a
contractor for the time they spend on the project and the resources they need to do the task.
This indicates that the contractor is keeping account of the time and materials used by its team
or subcontractors. They utilize this information to bill the employer correctly throughout the
project. T&M contracts, on the other hand, can include a fixed maximum price that limits
expenses.
Advantages

 It is simple to accommodate to changes in the project.

 Delays and roadblocks are readily overcome.
 Negotiations are established at the start of the employment.
Disadvantages

 It might be tough to keep track of time and supplies.

 Contractors are under no obligation to work effectively.
 Contractors must bear their own expenses.

References:
Alcocer, Y., 2021. What Is a Fixed-Price Contract? - Definition & Examples. [online] Study.com. Available
at: <https://study.com/academy/lesson/what-is-a-fixed-price-contract-definition-examples.html>
[Accessed 23 August 2021].

Dau.edu. 2021. Fixed Price Incentive Firm Target (FPIF) Contract Type. [online] Available at:
<https://www.dau.edu/acquipedia/pages/ArticleContent.aspx?itemid=102> [Accessed 24 August
2021].

Gaille, B., 2021. 15 Incentive Contracts Advantages and Disadvantages. [online] BrandonGaille.com.
Available at: <https://brandongaille.com/15-incentive-contracts-advantages-and-disadvantages/>
[Accessed 24 August 2021].

Kokemuller, N., 2018. [online] azcentral. Available at:

<https://yourbusiness.azcentral.com/advantages-disadvantages-fixed-pricing-dynamic-pricing-
13188.html> [Accessed 23 August 2021].

Projectvictor.com. 2021. What is a Fixed Price Incentive Fee (FPIF) Contract?. [online] Available at:
<https://projectvictor.com/knowledge-base/fixed-price-incentive-fee-fpif-contract/> [Accessed 24
August 2021].

UpCounsel. 2021. Benefits of Fixed Price Contracts: What You Need to Know. [online] Available at:
<https://www.upcounsel.com/benefits-of-fixed-price-contracts> [Accessed 23 August 2021].

UpCounsel. 2021. Cost Reimbursement Contract Advantages and Disadvantages. [online] Available at:
<https://www.upcounsel.com/cost-reimbursement-contract-advantages-and-
disadvantages#:~:text=Cost%20reimbursement%20contracts%2C%20also%20called%20cost-plus
%20contracts%2C%20are,the%20contractor%20for%20the%20full%20cost%20of%20materials.>
[Accessed 23 August 2021].