Contract Pricing: The Good, The Bad And The Ugly

As a specialty contractor, Kraemer Gunite, Inc. has been involved in just about every type of contract pricing.   Fixed price, fixed fee, time and material, open book, cost plus, unit pricing, even some creative combinations.   We are sometimes asked which we prefer.     There is no clear cut answer and there may be several good choices for a given project.   And since there is rarely two identical projects, what's best for one may be unsuitable for another.   There are, however, at least two things common to all projects.   Owners want the most for their money and contractor's want to make a profit.     It is our experience, that with enough forethought and planning both parties can emerge successful.

Fixed Price (Lump Sum) Pricing

In a fixed price contract the owner outlines the project requirements and solicits lump sum prices from an interested group of contractors.   The owner generally will select the lowest qualified bidder.

The Good 

The Bad

The Ugly

Time and Materials Pricing

In a time and materials contract the owner reimburses the contractor for all direct costs for labor, materials, equipment, subcontractors and all purchases.   A mutually agreed to percentage is then added  for the contractor's home office overhead, indirect costs and profit.    The usual format is hourly rates for labor; daily, weekly or monthly rates for equipment rentals and materials at direct cost plus the agreed to percentage.

The Good   

The bad

The Ugly

Fixed Fee Pricing

With a fixed fee contract the owner pays a pre-determined "fixed fee" for the contractors indirect costs and profit usually based on the project size and duration.   The owner directly reimburses the contractor for all direct costs for labor, materials, equipment and subcontracts.  

The Good

The Bad

The Ugly

Unit Pricing

With a Unit Price contract the contractor is paid a fixed amount for each unit of measure that's completed.   Standard units of measure vary from industry to industry.   Examples from our line of work include; linear foot, square foot, cubic foot, cubic yard, bag, gallon among others.   Often there is a fixed price component over and above the unit pricing that covers invariable costs like the contractors mobilization and demobilization.

The Good

The Bad

The Ugly

So what do we recommend to owners to help them get the most for their money?

1. Define the work.  

2. Prequalify the bidders.

3. Get Pricing On Equal Ground

Owners can gain the benefits and avoid the pitfalls of contract pricing by starting out with a clear definition of the scope of work including how fast the job must be done.   If the work scope is unclear and difficult to define in detail, a fixed price contract is probably not the best choice.   Be suspect is bids are scattered high and low.   The US government routinely re-bids projects when this happens.   Experienced contractors know at a glance what price range a project falls into.

The key to successful contract work is to secure a reliable and trustworthy contractor and get the terms of the agreement; pricing, payment terms, schedules, etc. spelled out in advance.    By carefully considering what type of contract would be most suitable for a given project, owners can maximize the good, minimize the bad and avoid the ugly.

 

Contact Us

Kraemer Gunite, Inc.

PO Box 305

Pitman, New Jersey 08071

Phone: 856-227-8097

 

 

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