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Reviewing Cost-Plus vs. Fixed Price Contracts

After 10 years in the field, a remodeling contractor had worked on quite a few jobs. Some had been set up as fixed-price contracts and others had been performed on a costplus basis. Looking to improve his companys financial performance, he asked his CPA to review the pros and cons of both formats and to recommend the best approach.

 

“Both types of contracts can work if you have a reasonable client with clear and realistic expectations, she began. They both agreed, however, that this ideal situation wasn’t always the case.

 

Further info required

Under a fixed-price arrangement, the contractor establishes a set price for the job regardless of the actual time and materials used. This type of contract requires a detailed and accurate estimate. The CPA advised the contractor to:

 

  • Assess his confidence in his own estimates,
  • Examine the calculations he was using to forecast job costs, and
  • Arrive at an appropriate markup to cover over­ head and profit.

In addition, he needed to re-examine his change order process.

When you have sufficient information going in, a fixed­ price contract will ensure that youll be compensated adequately. It also gives your client the assurance that his or her budgeted amount will get the job done, barring any major changes (which is why it’s important to have a good change order process in place).

On the other hand, the CPA said, its risky to submit a fixed-price bid and sign a contract when too many details remain unspecified. Clients repeatedly ask to set a price before specific fixtures and finishes are decided, for example. So the contractor is continually at risk for underestimating and losing money. Again, it comes down to whether the contractor can establish detailed specs at the outset.

Costly disputes
On a cost-plus job, the client agrees to pay job­ related expenses plus an additional percentage or lumpsum amount to cover overhead and profit. When only limited information is available at a project ‘ s outset, this approach allows the contractor to bill for actual costs incurred rather than having to estimate ahead of time.

 

The CPA noted that, in the past, cost-plus arrangements have enabled the contractor to find the best prices on building assets saving clients’ money. She also noted that the company has experienced several expensive and time-consuming customer disputes. Thus, the contractor needed to evaluate whether the fallout from these conflicts was worth the greater pricing flexibility.

Better approach
In this case, the contractor and CPA were able to go back several years and, using historical company data, perform a cost-benefit analysis for both approaches. They decided that, because of his advanced estimating methods, fixedprice contracts were likely better. But this may not be the case with every construction company.


Updates Available: Hot Apps for Contractors

In the construction industry, most of the day-to-day action takes place in the field. So it’s only natural that contractors are eager to find mobile apps for smartphones and tablets that can help them work better.

 

Developers have responded with a wide range of products designed to suit a variety of job functions. Of course, that doesn’t mean you should rush out and download everything under the sun.

 
Big picture vs. small

For decades, traditional software companies have worked hard to develop comprehensive, integrated packages for contractors in areas such as project management, financial analysis and reporting, and fleet management. Many of these products have become useful front-office tools; however. They don’t always adapt well to a mobile platform.

 

For this reason, some of the most useful construction apps focus on specific tasks. When shopping for mobile solutions, think carefully about which aspects of your jobs could benefit from the enhanced data efficiency offered by today’s apps.

 

3 hot areas

There are many different types of construction apps available at the moment. But three of the hottest areas right now are:

 

  1. Safety management. These can facilitate job­ site inspections by providing both standard and customizable checklists as well as audit report templates. Some products can feed information directly into your company’s main database to help you integrate safety data with other project factors. Others facilitate safety training by recommending topics and documenting meetings.

    Some safety apps are free; others charge a modest fee for premium services. Various options are available on either the iOS or Android platform. Try the search term “construction safety inspection.”

  2. Tool tracking. Products in this category typically work with bar codes or RFID tags that are affixed to each tool and used to record who has a tool and for which job it’s being used. The solution maintains a record of who’s responsible for the asset at any particular time. It can also track rented tools so you can charge back rental costs to the appropriate project and return the items promptly when the rental period ends.

    Again, various products are available on iOS or Android. Try the search terms “tool tracking” or tool tracker.”

  3. Field management. Does your company need a quick and easy way to handle more comprehensive project management functions using smartphones or tablets? If so, these apps facilitate timely communication between field and office staff. They enable field personnel to keep jobsite diaries, take pictures, report employee and equipment time, and log material quantities used.

    These apps may particularly benefit smaller businesses and subcontractors who haven’t invested in a large project management system. Several different apps are on either iOS or Android. Start searching with the term “construction project management.”

 
Careful shopping

The cost of most construction apps is usually nominal. So its generally inexpensive to give one a try. But you’ve still got to be careful about disrupting your operations by implementing an app that your company isn’t ready to use. So shop carefully and proceed with caution.


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