Contract Pricing Uncovered

There are different ways you can request a contractor on how to price out a construction or service contract. They will likely be a variant or a combination of two types of contracts: time and material contract and fixed price contract.

Time and Material (T&M) Contract

In a T&M contract, the contractor provides the Owner with rate sheets with unit rates for the different types of labour, equipment and materials that will be required to complete the job. The payment and final cost of the contract will be dependent on the time and materials used to complete the job.

A time and material contract provides more flexibility as costs are charged as they occur. The job may be broken down into more specific tasks or progress milestones for transparency. Changes may be requested depending on unforeseen developments. If the complete scope and/or environmental conditions are unclear in the beginning, a T&M contract would be the preferred form of pricing.

Fixed Price Contract

In a fixed price contract, the contractor will make an estimate of the total cost required to complete the job and provide you with a lump sum price to bring the job to completion regardless of actual expenditures in the execution of the job.

A fixed price or lump sum contract gives you stronger budget control. If the scope of the project is well defined, a fixed price is a good choice if there is a maximum amount you are willing/able to pay. This type of contract also has less management and administrative costs as you will likely pay upon completion or milestone for the work. The contractor takes on more risk and responsibility but is likely to charge a premium to hedge against uncertainties for the project.

Contract Reimbursement

Projects can be broken down and measured in a variety of ways and therefore affect how it is priced and reimbursed. Work Breakdown Structuring (WBS) will affect both project management and accounting. Both fixed price and T&M can be progressed by time (payment installments in a fixed price contract or monthly cost based on actual resource usage for T&M), Earned Value (% of the project completed), or some other technical milestone. A time and material can also incorporate a cap, meaning that the contract cannot exceed a predetermined upper limit. This arrangement provides some of the advantages of a fixed price contract into a time and material contract.