Advantages of Fixed Price Contract in Construction
Fixed price contract in construction set a certain price for the materials, products, and services listed which will go into a project.3 min read
There are several advantages of fixed price contract in construction. These are contracts that have a certain price set for the materials, products, and services listed which will go into a home renovation or building project. This cost will not increase during the project, even if unseen issues come up.
What is a Fixed Price Contract in Construction?
With this type of contract, the seller and buyer will go into the agreement by deciding together what the final cost of the service or good will be and will list this in the contract. Both parties will agree to this and acknowledge that by signing it. The length of time for the fixed price is also listed in the contract. This strategy is where the client or customer receives a fixed price no matter how many materials or how much time has actually gone into it. It's commonly seen in the construction field, which is a service-based business.
There are both pros and cons to having dynamic pricing. This contract means the client and construction company are agreeing to one price that won't change, unlike a dynamic pricing approach where the agreement lets the price be adjusted based on material costs and time. An example of dynamic pricing is hourly billing.
Advantages of a Fixed Price Contract in Construction
A predictable scenario comes from a fixed price contract for both the seller and the buyer and provides stability during the contract's length. The buyer might be worried about the cost of a service or goods increasing suddenly, which would negatively affect their business plans. On the other hand, the seller might be worried about the price of their service or good suddenly dropping, which will reduce their income with no warning. A buyer has an advantage with a fixed price contract, any extra costs that go past the initial estimate will get shifted to the seller.
Someone who works for the buying company might like this type of contract, as there are several advantages. These include the following:
- Allowing them to have a solid budget to show their superiors to get approved (compared to a contract that has rising costs as time goes on).
- Receiving a benefit from the value of the service or good increasing drastically due to the market.
- Having the option to budget for the contract's costs and make sure there will be enough company funds until the end of the contract.
The buyer and construction company both enjoy fixed contracts, as they can budget easier this way. Businesses often get these type of contracts since their customers prefer transparent contracts when it comes to pricing compared to hourly billing which is sometimes open-ended. The possible increase in revenue and customers is sometimes more appealing than the risk of estimating the cost of projects.
This legal agreement has definite parameters as to what the contract's total value is, and it gives small business owners a few advantages. Their company remains in control of the amount owed and they'll know the maximum value up front. They can also control hiring costs outside their company since the contractor and business figure out what the agreement's total value is before signing it. This monetary value is not often subject to any kind of escalator. If there is one, it will have a ceiling that states the cap for the dollar value of the contract.
Disadvantages of a Fixed Price Contract in Construction
There is more predictability when it comes to the costs of a service or good for the buyer, this can come with a price. The seller might see the risk of setting a price of their products and will decide to charge more than they normally would for a price that's fluid. They also might set the price to something they could negotiate with the seller on a constant basis to make up for the large risk the seller is taking.
When the price drops of the good or service, the buyer has a disadvantage, while the seller has an advantage. The buyer may not honor their contract anymore if the costs of the service or goods dramatically increase.
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