Pricing Structures

Commercial Pricing Structures1) Fixed Price Contracts

This structure incorporates methods such as unit price contracts, fixed price incentives, and lump sum contracts. The latter, which is also considered as the most common contract type, is a contract where the winning bidder is paid the amount quoted in lump sum provided they complete the outlined construction.

Lump sum contracts allow very minimum changes and such changes do not involve the contractors fee at all. In contrast to this, fixed price incentive contracts permit changes that may affect the contractor’s fee. In this pricing method, the final price is achieved at by utilizing formulae that adjusts the returns by considering these two factors:

o The contractor’s total final negotiated costs, and

o The total target costs

This pricing plan becomes applicable where the costs being suggested by the company or organization is not suitable to the contractor.

Last of the fixed price contracts, is the unit price contracts. In this contract, the pricing is done on each individual unit or item being part of the contract. The final total costs are then a summation of the individual costs. For this scheme to work, the units need to be measurable. Examples of units in a construction contract include:

o Brick dimensions in square feet

o Length of pipe used in meters

o Soil volume in cubic yards, among other items

Fixed pricing contracts allow for alternatives and contingencies. In addition to that, it is also distinguished from the rest for its all-inclusive nature and the fact that it allows for an easier bid comparison.

2) Cost Reimbursable Contracts

This pricing structure also has three elements to it, cost plus percentage of cost, cost plus incentive fee, and cost plus fixed fee contracts. Cost plus fee contracts see the contractor get paid the sum quoted in the contract plus an extra pre-specified fee.

In contrast to this, cost plus incentive fee contracts require the contractor to meet some contract-related criteria before they can be entitled to the additional fee. The extent to which the criteria are met also determines the amount of fee due to them.

Contracts of “cost plus percentage of cost” nature, cover the contractor for overhead costs and other expenses incurred by increasing the amount of money due to them by a certain percentage of the total costs.

Cost reimbursable contracts draw their benefits from the fact that they are best placed to counter unforeseen occurrences as well as clearly define items eligible for reimbursement. These contracts also don’t necessarily require the full set of construction documents.

3) Guaranteed Maximum Price Contracts

This type of arrangement is very much preferred where the probability of the estimated total costs being higher than the actual costs incurred at the end of the contract is very high. The contract contains a savings clause that provides for a split of the difference between the contractor and the owner.

The contract also outlines that the estimated costs should not exceed a certain set out limit. This ensures that the quotations are reasonable and controls the overall costs. Another benefit inherent in this contract is that it promotes value engineering.

4) Design Build Contracts

This pricing structure integrates construction elements like the design, permit acquisition, project management process, and the actual construction process. This allows all of these tasks to be completed at once streamlining the build-design environment.

The benefits that come with this contract includes the fact that it provides the owner and the contractor with a value-based feedback system. It also creates accountability on the part of the contractor plus the guarantee of a single-source project delivery.