Price Structuring in Construction Contracts: Fixed, Cost-Plus, Unit Price; Pros and Cons; New Tariff Impact

Description

The pricing structure is one of the most important decisions made when negotiating a construction contract because it not only establishes the cost of the project but also determines the rights and responsibilities of the parties. There are three basic types of pricing structures in construction contracts: (1) fixed price; (2) cost plus (with or without a guaranteed maximum price or GMP); and (3) unit price. Counsel should not rely on form contracts, but rather be able to carefully negotiate critical provisions and customize the contract for their clients' needs.

Under the fixed price structure, a contractor is paid a sum certain for the project and bears the risks of increased costs unless changes have been allowed for in the contract (e.g., a properly issued change order). In contrast, under cost-plus contracts, the contractor is paid the full price for agreed-upon costs that include actual construction related costs and costs associated with contractor overhead and profit. Cost-plus contracts may include a GMP which caps the owner's maximum liability for construction costs incurred on the project. Finally, under unit price contracts, the contractor sets a price for each unit of work to be completed. Typically, the unit cost includes the contractor's profit and overhead.

Each type of structure is best used under certain circumstances, has advantages and disadvantages for each party to the contract, and contains critical provisions. Therefore, it is imperative that counsel understand the key differences between the pricing models to help clients select the right structure for their project.

Additionally, with the imposition of new tariffs impacting the supply chain and the construction industry, counsel should understand how to address tariffs in the construction contract and which structure might be best to accommodate project cost uncertainty moving forward.

Listen as our expert panel closely examines the most frequently used pricing structures for construction contracts. The panel will provide advantages and disadvantages for each and offer best practices for drafting. The panel will also address which pricing structure may be best to accommodate potentially rising construction costs under the new tariffs.