
TURN-KEY - You will get a fixed price of what you will pay to get your home built or repaired. This price will not change unless unexpected expenses arise such a you change your mind about a finish or a fixture. To change a price it requires a change order signed by both parties.
COST PLUS- sometimes called time and materials. The GC gives you a price for Labor and materials plus his mark up. Materials may fluctuate in price causing your build to fluctuate as well.
When embarking on a construction project, it is crucial to establish clear expectations and guidelines for both parties involved. One crucial aspect that needs to be addressed is the type of contract to be used. In the construction industry, two common types of contracts are Turn-Key (Fixed Price) and Cost Plus (Time & Materials) contracts. Let's take a closer look at these two options and explore the pros and cons of each.
Turn-Key (Fixed Price) Contract:
A Turn-Key contract is based on a fixed price agreed upon between the contractor and the client before the commencement of the project. In this type of contract, the contractor assumes complete responsibility for the project, from design and planning to construction and project management. The contractor is required to deliver the project in its entirety, ready to be handed over to the client.
Pros:
1. Budget Certainty: With a fixed price, the client knows exactly how much they need to allocate for the project. This provides budget certainty and can help avoid unexpected cost overruns. If unexpected costs do arise the contract cannot be changed unless the new expense is agreed upon in writing.
2. Reduced Client Involvement: Since the contractor is responsible for the entire project, the client can be less involved in the day-to-day management, allowing them to focus on other aspects of their lives.
3. Increased Contractor Accountability: As the contractor assumes full responsibility for the project, any potential delays or cost overruns are their responsibility to address.
Cons:
1. Limited Flexibility: Once the contract is signed, changes to the project scope or design can be challenging to incorporate without additional costs.
2. Lack of Transparency: Since the contractor is responsible for managing the costs within the fixed price, the client may have limited to no visibility into the breakdown of expenses.
Cost Plus (Time & Materials) Contract:
In a Cost Plus contract, the client pays the contractor for the actual cost of labor, materials, and other direct expenses, plus an agreed-upon fee. This type of contract allows for more flexibility and transparency in terms of project scope and design changes.
Pros:
1. Flexibility: Cost Plus contracts allow for adjustments to the project scope and design as needed, accommodating changes during construction without the added headache of change orders.
2. Transparency: Since the client pays for the actual costs incurred, they have greater visibility into the project's expenses, promoting transparency and potentially reducing misunderstandings.
3. Shared Risk: With a Cost Plus contract, both the client and contractor share the project's risks and rewards, fostering a collaborative approach.
Cons:
1. Budget Uncertainty: Unlike Turn-Key(fixed price ) contracts, Cost Plus contracts do not provide fixed cost certainty from the outset. Costs can increase based on unforeseen factors or changes made during the project.
2. Potential for Disputes: Without a fixed price, there may be disagreements between the client and contractor regarding the scope of work and expenses, leading to potential disputes.
Choosing the right contract type for a construction project requires careful consideration of the specific requirements and circumstances. A Turn-Key contract offers budget certainty and minimizes client involvement, but sacrifices flexibility. On the other hand, a Cost Plus contract allows for more flexibility but can introduce potential budget uncertainties. Ultimately, the decision should be based on the project's goals, level of control desired by the client, and the level of trust established between the parties involved.
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