Understanding The Contracts: Stipulated Sum vs Cost-Plus

Construction contracts are quite complex and can sometimes cause confusion among clients. There are many factors to consider when deciding whether to opt for a cost-plus or stimulated-sum contract for your next project. Each type of contract comes with its own advantages and disadvantages. Therefore, it is crucial to understand each contract and the circumstances that require each one. Knowing more about the distinct types of agreements will help you make the right decision the next time you enter into a contractual project agreement. Continue reading to learn the advantages and disadvantages of cost-plus and stipulated sum contracts, along with how to decide between the two.

What is a stipulated sum contract?

A stipulated sum contract also called a lump sum or fixed fee contract, is a contractual agreement in which the contractor agrees to complete the project for a predetermined set price.

A stipulated sum contract binds the contractor to agree to be accountable for project execution at a predefined cost. The tenant has delegated the risk of project costs to the contractor. As a result, if the actual labour and material costs are higher than expected, the contractor’s profit would be lowered. In contrast, if the actual costs are lower, the contractor’s profit increases. Overall, in either case, the price for the tenant stays the same. However, this does not mean that the entire amount must be paid in one single payment at the end of the contract. A stipulated sum contract may establish a total amount for the project while still allowing for periodic payments.

Advantages

Predictability
Efficient timeline
Less financial risk
The set price will not change (Financing is more accessible)

The key benefit for clients is the contract’s predictability. The owner can expect the project to be finished on time and under budget. Clients face less financial risk with stipulated sum contracts because the contractor is accountable for cost overruns. Furthermore, supervision is minimal because the client does not need to track costs. Financing is simplified because payment structures for stipulated sum contracts can include periodic payments at defined iterations or as a percentage of completed work, streamlining accounts payable operations.

Disadvantages

It is difficult and costly to adjust your scope of work once construction has begun.

A stipulated sum contract requires that both parties agree on the scope of work. It is the only way for the contractor to offer an exact bid and execute the project as agreed upon. It also means that these contracts cannot be too flexible. Furthermore, when a stipulated sum contract is agreed upon, the contractor assumes all the risk involved with bringing the project to completion. If the project goes over budget, the contractor handles any cost overruns.

Best for:

Stipulated sum contracts are best for projects that have a sharp vision. These contracts are most effective for projects with finished plans, well-defined scopes and schedules, and comprehensive documentation of all evaluations and other pre-construction operations. These factors are critical in allowing parties to estimate project expenses and offer the lump-sum amount accurately.

What is a cost-plus contract?

A cost-plus contract, also known as a cost-reimbursement contract, compensates the contractor for all project expenses and a service charge. The added fee is there to offset the contractor’s profit. Cost-plus contracts differ from stipulated sum contracts because there is no set fee. Instead, the tenant agrees to pay the cost of the work, including all trade subcontractor work, labour, materials, and equipment, plus an amount for the contractor’s overhead and profit. Moreover, if actual costs are lower than projected, the client saves and receives the difference. However, the client must handle the cost overruns if the actual costs exceed the predicted expenses.

Advantages

Costs are decided by what the tenant requests.
Better balance of responsibility managing costs between the contractor and the buyer

The advantage of a cost-plus contract is that the project should produce the original vision. The client’s preferences determine the costs and can be as high or low as desired. There is a more balance of responsibilities for cost management between the contractor and the client. Tenants are more involved in decisions such as tradespeople/subcontractors’ decisions and material selection based on price and quality. You can secure the best quality supplies because you pay for them directly, not through the contractor’s payment.

Disadvantages

More supervision from the tenant is needed
Can accumulate a high cost
Can exceed the original timeline

Cost-plus contracts are harder to track, and more supervision is needed. Although tenants have a more significant say in major decisions, this means they will need to dedicate more time to the project, which may take time away from other job responsibilities. There is also a greater danger of cost and timeline overruns because there is little incentive for the head contractor to ensure the accuracy of subcontractor quotes, keep on schedule, or keep costs low. If there are change orders due to a design mistake or lack of documentation, you are at risk of schedule and cost exposure. Overall, a cost-plus contract is not structured to drive the best value or savings for the client.

Best for:

Cost-plus contracts are best suited for projects when it is hard to foresee the final expenses or when there is insufficient information to make a precise estimate due to incomplete final designs.

AURA’s integrated process and stipulated sum contract

An integrated approach is where strategy, design, and execution combine to bring your workplace vision to life through our unified team and holistic approach. At Aura, you get one entity, one contract, one seamless flow of communication and work from concept to completion. An integrated design/build approach cuts the bidding process and multiple contracts while putting the client under contract with one entity delivering a complete construction project. One firm will supply and oversee all construction processes up to completion. A fixed-sum contract at AURA ensures cost control and transparency. Once the design is done, we implement a stipulated sum contract at the start of the construction phase. Until then, we provide progressive budgeting throughout the process, beginning with 15, 30, and 60 percent drawings.

proj delivery timeline

What you get when you select AURA

Aura takes on the full design and construction risk. We agree with you on a budget, go out to sub-trades to confirm that price through design, then take on the risk at the end of design, guaranteeing the cost and schedule. From the beginning, you get a quote for the project cost and ensure the project budget/ costs are as presented. This drops surprises or cost overruns while allowing the client to keep the power and approve any material substitutions or construction changes. You will be kept informed of any substantial field changes from the original design, schedule issues that may affect the budget, staffing shortages, or material substitutions that may compromise the project’s design, timeline, or budget. Furthermore, AURA acts as a general contractor, hiring all skilled trade service providers needed and takes complete charge of the day-to-day construction operations and supervision of all subcontractors working on the project.

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