Contract Pricing: The Good, The Bad And
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
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
- Fixed price or lump sum contracts can provide a fair
comparison of pricing between competing contractors.
- Minimizes paper work and associated costs.
- Contractors bids may not be identical. Some
may include items that others do not. To get a fair comparison
between bids, owners must sort out the differences and get all proposals on
- Most contractors add an arbitrary amount to their bid
to cover unknowns. For example, bad weather, employee absenteeism,
delayed material deliveries, equipment malfunction, or other unexpected delays that have the "potential"
to cost the contractor money. The owner pays for unexpected
expenses whether they occur or not.
- Contractors that underbid or don't consider unknowns
can find themselves incurring unexpected, profit eroding, expenses.
With no other recourse, corners may be cut and prices for changes in scope of
work can be inflated in the contractor's attempt to save the project from
- Intangibles, such as; productivity and the contractors
reliability cannot be determined from a single price. A contractor
that shows up intermittently, works with an inadequate crew, schedules tasks
and/or handles subcontractors and vendors poorly, can take longer to finish a
project. When downtime is costly to an owner, the price of
the job can become insignificant in relation to extended downtime costs.
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.
- With T&M contracts the owner pays for exactly
what they get based on actual hours worked and costs incurred.
- The scope of work can be undefined and take shape as
the job progresses under the complete control of the owner.
- The contractor can focus on the job at hand confident
that every effort is compensated.
- The owner can easily calculate the cost of the job at
any point in time, knowing when to expand or reduce the scope of work based on
the available funds.
- The project can be stopped at any time at the owner's
discretion without penalty.
- Productivity, quality and technology factors are
invisible when comparing hourly rates between various contractors.
These factors can have a tremendous impact on the final price of the project.
What take one contractor a week to complete can take another a month.
- T&M contracts require detailed accounting by both the
owner and contractor which adds to the cost of the job.
- Contractors that go in with inadequate price rates may
over man, over equip and/or drag out a project in an attempt to build up
- Nickel and dime charges can emerge in the contractors
attempt to supplement low rates.
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
- A Fixed Fee contract can provide a fair comparison
between equally productive qualified contractors.
- The contractor can focus attention on the job at hand
confident that they are being compensated for every effort.
- Vital productivity, technology and quality factors are
invisible during the evaluation process. An unproductive
contractor that uses antiquated technology can cost the owner significant
extended downtime costs.
- The need for detailed accounting adds to the cost of
- Quality can be sacrificed for speed. Since
the contractor is getting a fixed amount for indirect costs and profit,
regardless of project duration, an "earlier the better" mentality can be
quickly adopted by the contractor. The sooner the job
is done the faster the contractor can collect and get on with the next
project. The owners best interest can take a back seat to
getting the project done in a hurry.
- Contractors that go in with an inadequate fee can lead
to strenuous negotiations for a fee adjustment when more or less work is
required, especially when there is no contract provision to handle changes in
the scope of work.
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
- Unit Price contracts can provide a fair comparison
between equally productive qualified contractors.
- The owner only pays for what work is done based on
actual field measurements.
- Marginally more or less work can be done without the
need for unit price renegotiation. Unit price adjustments can be
built in for the addition or deletion or work.
- The owner can determine what they are spending at any
point in time since price is directly related to the number of units
- Since more units done gets the contractor more
money the emphasis is put on quantity not quality.
- A Unit Price is only as good as the estimated number of
units used for the price base. A poor estimate will cause the Unit
Price to be out of whack. The usual relationship is the greater the
number of units the lower the unit price and vice versa. The
accuracy of the initial unit quantity estimate can determine the success
or failure of the project for both parties.
- Unit Price contracts can become complicated when
variables other than unit quantity exist, such as work area location and
imposed deadlines which may require overtime work to meet. For example,
it cost substantially more to paint 1000 separate areas measuring 1 square
foot each on a Holiday than it does to paint 1000 square feet in a single area
during a normal workday.
- A detailed account of the amount of work done must be
logged on a regular basis by the owner and contractor which adds to the cost
of the job.
- Negotiations can become strenuous when the number of
units differs significantly from the initial estimate and there is no contract
provision addressing the matter.
So what do we recommend to owners to help them get the
most for their money?
1. Define the work.
- Write down the exact scope of work in as much detail as
- Make it clear what facilities you have for the
contractor to use and what you expect them to provide for themselves.
- Carefully select what information to give the
contractors. More is not always better. The task of sorting
out needed from useless information can become overwhelming, add to the cost
of the job and discourage qualified contractors.
2. Prequalify the bidders.
- Find companies that specialize in the type of work you
want done and have the support needed to see the job through to completion;
that is; experienced management and supervisors, trained personnel, equipment,
suppliers, financing, bonding, etc.
- Be sure the contractors have a successful work history
performing similar work. Request a list of clients
from the candidates and by all means call several or all of them. Beware
if a contractor is reluctant to supply references or only gives one or two.
This could be a sign the contractor is trying to keep you from contacting
- Get feedback from friends, colleagues and acquaintances
about the contractor's reputation.
3. Get Pricing On Equal Ground
- List exclusions and items some contractors provide and
others do not using a pro and con format. Beware of companies that
take many exclusions and leave owners wide open to additional charges that can
make an apparent low bid the highest. Look out for the fine print.
- Determine what method will be used for adjustments if
more or less work is done. Include this in the evaluation process.
Beware if the contract price skyrockets with a minor change.
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.
Kraemer Gunite, Inc.
PO Box 305
Pitman, New Jersey
© Copyright 2013 Kraemer Gunite, Inc.
All rights reserved.