There are many things to consider when hiring a contractor. From finding the right fit to finalizing a timeline, there’s a lot to think about. During this planning phase, understanding different pricing models will help keep you and your contractor on track and on the same page. Follow our guide below to understand different pricing models and how it could impact your project.

What Are Pricing Models?

Pricing models are how a contractor sets up their quote and determines how they keep track of finances throughout your project. There is much conversation and debate among contractors as to which pricing model is “best”. The top two models are fixed bid/cost or cost plus. We will dive deeper into those types below. But generally, pricing models are heavily determined by the scope of work being completed.

Fixed Bid Pricing

Fixed bid or fixed cost pricing contracts have a predetermined price before work begins. The only time that the price will fluctuate is if the customer wants to make a change during the project (often called a change order). This means that if the project takes longer than expected or the price of materials is different than the budget, the contractor will absorb those costs.

This pricing model is best when the scope of work is determined beforehand and there will not be many decisions made during the process. For example, if you hire a contractor to redo your tile grout, they will most likely already know how long it will take to complete regrouting and the cost of the materials needed. They would likely give you a final price up front.

Pros of Fixed Bid Pricing

• Predictable Cost: The homeowner has an expected final price and can be confident there will be no surprise costs. Since the contractor is responsible for staying within a set budget, they are motivated to keep all costs down and complete the work within the set timeframe.
• Sets Clear Goals A clear budget helps everyone (homeowner and contractor) plan more efficiently.

Cons of Fixed Bid Pricing

• Materials: Since the contractor has an incentive to keep costs low and not absorb the cost of more expensive materials, there could be a potential for lower quality materials to be used if exact material specifications aren’t included.
• Scope Creep: If your contractor runs into an unforeseen problem, they might have to renegotiate the price if the project requires more work. For example, if you hire a contractor to redo your stairs and they find wood rot below, more work will have to be done to deliver quality work and pass inspection.
• Less Flexibility: Since the final price is predetermined, if you decide that you want to change materials or have a different design option, it could be difficult to accommodate.

Cost-Plus Pricing

Cost-plus contracts don’t have a predetermined final price but can include a maximum price. The homeowner agrees to pay the cost of the project (time and materials) and a contractor fee. The contractor fee is either a fixed amount or a percentage of the cost. The homeowner bears most of the responsibility under this contract as all costs to the contractor will be reimbursed.

These types of contracts are typically for large construction projects like the building of a whole home. Often, construction begins before all the decisions are made such as wall color or bathroom fixtures.

Pros of Cost-Plus Pricing

• Flexibility: Any changes made throughout the project are easier to accommodate. Cost-plus also allows for any unseen issues or additional costs.
• Materials: Since there isn’t a fixed agreement on cost, contractors have a greater flexibility to choose higher-quality materials.

Cons of Cost-Plus Pricing

• Requires Management: If there isn’t a proper accounting of all costs by the contractor and homeowner, there is the risk of surprise prices. Cost-plus requires clear communication between the contractor and homeowner.
• Loss Predictability: The financial risk is on the homeowner if there are unforeseen problems and delays.
• Financial Incentive: The contractor may not have a financial incentive to keep costs low or complete the project on time.

When getting started on a project, determine which pricing model best fits your project. Always discuss all pricing details with your contractor as it’s better to ask too many questions than not enough.