When you're looking for bids for a home remodeling project, contractors may offer different types of proposals.
A fixed-price contract, also known as a lump sum contract, includes one all-inclusive price for completing a well-defined project.
A time and materials contract lays out a general project scope and an estimated cost, but your final price varies based on the actual labor required and materials used. This type of contract includes an itemized list of tasks and specifies an hourly rate for labor and a cost for materials (including markup). It can also be called a cost-plus contract or a cost-reimbursable contract.
I've worked with both kinds of contracts, and based on my experience, I think there are five reasons why a fixed-price contract is the best type of construction contract for the vast majority of homeowners.
With a fixed-price contract, it's the contractor -- not the homeowner -- who bears the risk of cost overruns. This is probably the most important difference between fixed-price contracts and time and materials contracts.
Under a fixed-price contract, you're paying for the finished product. From the beginning, you know the final price for the entire project, and it's all-inclusive of labor and materials. Costs that arise unexpectedly are the responsibility of the contractor, so you won't be stuck with extra costs incurred during the construction project.
That's not the case with time and materials contracts. If the contractor needs more labor hours to get things done, it's added to the price. You pay more even if it's because the subcontractors were inefficient or incompetent. If they make an error or oversight, you'll foot the bill. The actual cost of a project can come in much higher than anticipated, which is especially problematic for people on a tight budget.
Some time and materials contracts have indeed not-to-exceed clauses for maximum labor hours and materials costs. But what happens if you reach those maximums and the project isn't finished? Trust me when I tell you that you don't want to find yourself in that situation.
Construction doesn't always go according to plan. With a fixed-price contract, it's the contractor's job to resolve things cost-effectively. With a time and materials contract, the homeowner suffers if the contractor doesn't start with accurate estimates about the labor hours or materials needed.
In most remodeling, and construction projects, homeowners benefit from a focus on the finished product instead of a long list of tasks.
When I'm buying a plane ticket, I want to know the origin, destination, time of departure, and time of arrival. The key is that I arrive safely at the right place and at the right time. I don't need to see the pilot's pre-flight pilot checklist, the hourly rate of the gate attendant, or the GPS coordinates of the entire route.
In the same way, for most homeowners, it's more practical to keep their eyes on the prize, not the process. A lump sum contract draws their attention to the little details they actually care about, like fixtures and finishings. A time and materials contract draws their attention to tedious line items about how a construction project gets done.
Homeowners with lots of experience with remodeling and construction contracts may benefit from seeing all the details and costs involved. However, the majority of people are better served by focusing on the finished product and a fixed project cost.
Homeowners are always advised to shop around for bids for any planned construction projects. This comparison shopping is far easier with fixed-price than time and materials contracts.
With a fixed-price approach, a homeowner can see what they'll get and what they'll pay. The entire contract is straightforward, with an exact cost for the work performed. Comparing bids is simple because they all offer the same finished product.
Comparing project costs for a time and materials contract is far more complicated. Contractors don't use the same format or classify line items in the same way. Since they only offer a rough estimate with a generally agreed-upon scope, it's challenging for a homeowner to know whether a bid realistically estimates the labor involved or materials required. And if you opt for the time and materials contract approach, and the project takes longer to build, or the materials cost more, then your careful price comparison is out the window.
It may seem like you could compare multiple time and materials contracts by looking at the fixed hourly rate, materials costs, and estimated price, but the reality is that it's never that easy.
If you want detailed planning upfront, a fixed-price contract is right up your alley.
Contractors who work with the fixed-price model don't like open questions about the project scope or project duration. Since they bear the risk of cost overruns, they want all parties involved to have the same expectations for the completed work.
As a result, these contractors pay more attention to your vision and ensure that everyone is on the same page before starting construction.
With a time and materials contract, you may feel like you have to be a lawyer, project manager, and accountant.
Since there's more price variability in a time and materials contract, it's essential to have a well-written contract. To protect your interests, you'll need to optimize every law provision and contract clause, including a not-to-exceed clause to cap costs and a liquidated damages clause in case of a breach of contract.
Once the construction starts, you'll have to manage costs and payment milestones. This can mean monitoring actual hours worked by different subcontractors and making sure the labor rates align with what's recorded by the project owner. You may need to track material prices to confirm that the markup corresponds to the contract price.
If you have a contractor that you trust, you may not have to worry about all of this oversight. You can feel comfortable delegating everything to them as the project owner, knowing that the time and materials agreement is being properly managed. But most homeowners don't have that kind of relationship with a contractor, which means they take on the administrative costs of a time-and-materials contract.
Although I believe that fixed-price agreements are best for most home remodeling projects, I acknowledge that time and materials contracts can work well in certain situations. In this section, I want to take a closer look at some of the main selling points of a time and materials contract.
One reason that time and materials contracts are used in the construction industry is that some projects need more wiggle room for changes in the project's scope. In these cases, contracts with a fixed fee can be too rigid to accurately cover costs.
The flexibility of a time and materials contract is a major benefit for certain projects. However, most home remodeling doesn't require flexibility. When renovating a bathroom or basement, the scope of work should be clear, making it unnecessary to have an open-ended time and material contract with hourly labor rates.
Some people argue that a time and materials contract is beneficial because it shows an itemized list of the work the project owner will coordinate, the hourly rate for each worker, and the material costs.
An itemized list can benefit homeowners who have extensive remodeling experience. It can also be good for homeowners who have a trusted contractor who faithfully tracks the hours worked by each subcontractor.
But for many people, an itemized list is overwhelming. It also may not cover nitty-gritty details, such as:
Who pays for the time to go and get the materials purchased without anyone working on-site?
If the project owners need to replace a subcontractor, who pays for the time to find someone new? What if the new subcontractor has higher hourly labor rates?
Beyond direct materials for construction, who pays for indirect costs like plastic for dust control?
How does the contract account for dumpster fees (variable based on pounds hauled away), site supervision, permitting, and site cleaning?
The more issues that fall into gray areas, the more homeowners have to rely on the trustworthiness of their contractor and, if that fails, the strength of the legal provisions in their construction contracts.
Some homeowners like that a time and materials contract shows the markup on labor costs and material costs (e.g., the charge on top of what the project owner pays for those items).
If knowing the markup is a top priority, then a time and materials contract is advantageous. But I'd urge homeowners to consider whether knowing the markup is important.
In the end, what matters is the value you get from a remodel. If a fixed-price contractor delivers stellar results at a price that feels fair and fits your budget, does their markup really matter? Keep in mind, too, that their markup increases by staying on schedule, encouraging both efficiency and a high-quality outcome.
Theoretically, a time and materials contract offers the potential for cost savings: if construction and material costs are less, you pay less. At least, that's how time and materials contracts work in an ideal world.
From my 15+ years in this industry, I can tell you that's a BIG "if." Go poll homeowners, and I think you'll find that cost savings are rare. Higher costs are more likely than cost savings with time and material contracts.
This goes back to a key point: a time and materials contract pushes the risk of unexpected costs onto homeowners. While a contractual guaranteed maximum price can help, there's much more price unpredictability with a time and materials contract.