What are fixed price construction contracts?
Fixed price contracts, also known as lump sum contracts, are agreements between homebuilders or remodelers and their clients to pay a single predetermined amount for residential construction services. This price rolls up the material cost, labor, markup, margins, taxes, and any other fees from the contractor into one amount to be paid by the client. These contracts often include allowances that give clients some financial flexibility in specific selections without significantly impacting the price point of the project.
Is there a difference between fixed price and lump sum contracts?
No, fixed price contracts and lump sum contracts are interchangeable terms for contracts that provide clients with one price to pay for goods and services. Both terms are widely acceptable and used in the residential construction industry.
Why are fixed price contracts important in residential construction?
Fixed price contracts are important in residential construction because they simplify costs for contractors and clients and because they protect home builders and remodeler’s profit margins. By providing a single amount to be paid, contractors make it easier for their clients to understand costs and budget accordingly. Instead of having to wrap their head around a growing list of costs, clients can simply focus on the bottom line. For builders and remodelers, fixed price and lump sum contracts make it straightforward for home builders and remodelers to project costs, margins, and profits for their business.
Many contractors also prefer fixed price contracts because it means they don’t have to reveal their margins and markups to clients. Some residential construction professionals prefer not to reveal their markups to clients because they believe doing so would invite discussion or disagreements between clients and contractors about said fees. The other main type of contract used in residential construction are open book, or cost plus, contracts. These contracts provide clients with a running tally of project costs which include visibility to contractor markups
How do home builders and remodelers use fixed price or lump sum contracts?
For home builders and remodelers, creating and using fixed price contracts involves leveraging their construction estimate to provide clients with a price to pay for their project. This can be done with manual methods, dedicated software tools, or integrated construction project management software.
Manual methods
Using Microsoft Excel or Google Sheets, home builders and remodelers can tally up the total cost of a project from their estimate to use in a Word document with legal language detailing cost structures and project payment procedures. This document is then sent to prospective clients to sign. Unfortunately in manual methods any spreadsheet or copy and paste errors in spreadsheets are codified and made binding when the fixed price contract is signed which can cost home builders and remodelers when it comes to protecting their margins.
Fixed price contract software
A number of contract software options are available online today for a variety of business needs. These software packages typically allow users to build out contract template libraries, securely send contracts to clients, obtain e-signatures, and receive payments. These packages range from being free for limited features to costing $1,000 for larger organizations.
While these contract software packages are malleable to fit many different customer needs, they are best suited for rinse-and-repeat operations with predictable structures, language, and costs. Often this means they are not a great solution for home builders and remodelers whose contracts involve project details and pricing which change from job to job.
Integrated construction project management software
Integrated construction project management software provides great support for fixed price contracts by seamlessly incorporating details from the entire residential construction project into the contract. CoConstruct is one example of an integrated software solution that allows builders and remodelers to build out their estimate with cost lines, markups, margins, and taxes, and then import the financial information they want directly into a proposal to electronically send to clients to sign.
