This episode explores three primary ways to structure contracts, focusing on fixed price (lump sum), time and material, and cost-plus contracts. Each type is explained with its unique characteristics and applications, providing listeners with a comprehensive understanding of contract structuring.
This episode explores three primary ways to structure contracts, focusing on fixed price (lump sum), time and material, and cost-plus contracts. Each type is explained with its unique characteristics and applications, providing listeners with a comprehensive understanding of contract structuring.
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Jeff Williams:
Howdy folks, welcome to another Construction Cowboy Show and it's great to be with you today for the next 5 to 10 minutes. Today's topic is three ways to structure contracts. This is especially useful in construction or any project-based business. Each method includes when to use it, pros and pitfalls to watch for.
Jeff Williams:
So we'll start off with the first one, fixed price or as we call it the lump sum contract. How it works, you give the client one price for the entire job which includes materials, labor, overhead, freight, taxes, and you want to make sure you don't forget your profit when you do that. Best for well-defined scopes.
Jeff Williams:
Projects with detailed drawings or plans, work where quantities and varieties are predictable, and have material takeoffs completed. The pros to this type of contract are clients love it because they know the total cost upfront, easy to invoice, typically 30, 30, 30, and 10, or similar milestone payments, high profit.
Jeff Williams:
Potential if you manage it efficiently pitfalls If something is missing from the scope you eat the cost unless you have strong Change order language in the agreement and I recommend you do that Requires tight budgeting planning and skilled management Scope creep can destroy profitability without clear boundaries.
Jeff Williams:
So the quick tip, protect yourself with a solid exclusions list in this contract. A clear change order process, again, really define what that is in detail. And then documented assumptions. Make some assumptions that your clients are really clear on those assumptions. Stand behind them. Number two, it's time of material.
Jeff Williams:
How works, client pays for actual labor hours plus actual material cost and plus a markup. Usually it's a 10 to 25 % depending on the trade or the agreed amounts. Best for uncertain or evolving scopes, repair work, maintenance, retrofits, projects where you can't...
Jeff Williams:
Actually predict labor or materials. The pros to this are you never lose money on surprises. Incredibly flexible, easy to start quickly without full drawings or specs. Some of the pitfalls. Clients sometimes fear they'll pay forever. You need clear documentation like time sheets, receipts, material logs.
Jeff Williams:
If you're inefficient, the client may ask or question the bill. Tip. Set expectations upfront. Labor rate sheet in writing. Material markup percentage in writing.
Jeff Williams:
Minimal trip charges and daily sign-off sheets that goes for your subcontractors if that's what you're working with or anyone on your teams lots of documentation number three this type of contract is a cost plus contract and how it works is that clients pay actual costs for the project plus a fee which can be a flat fee.
Jeff Williams:
A percentage of cost 10 to 20 % standard, a fee with a guarantee max price, GMP, and this is one of the best ways to do that. I sort of prefer that. Larger projects, so best for larger projects, jobs where the scope will change as you go, clients who want transparency, the pros, very fair to both sides.
Jeff Williams:
Paid for everything and every change or even changes it's made, encourages collaboration instead of conflict. The pitfalls to this one requires trust and transparency, lots of documentation. If percentage-based, some clients feel like you're incentivized to spend more unless you communicate well.
Jeff Williams:
Tips for smoother jobs.
Jeff Williams:
Many contractors use plus cost with the GMP, which gives the client peace of mind and still protects your profit. In closing, I will name three more types of contracts, but I will not provide details here in this show. However, you are welcome to request more information. Three more advanced structures or design build, performance-based contracts.
Jeff Williams:
And unit pricing contracts. Remember the three main types of contracts that we just discussed. Fixed cost, which is a lump sum, time and materials that speaks for itself, and then cost plus, and I would add the GMP to that. That way everybody's both sides are protected. Again, happy trails to all of you. Until we meet again.
Jeff Williams:
I leave to all of you a cowboy blessing. May your bellies never grumble. May your heart never ache. May your horse never stumble. And may your cinch never break. See you soon.