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A fixed-price contract may allow for adjustment where a firm fixed-price contract does not. The administrative burden is minimal with a fixed-price contract, but with a firm fixed-price contract, the contractor accepts the greatest risk if costs unexpectedly rise.
Advantages and Disadvantages of Using Cost-Plus Contracts They eliminate some risk for the contractor. They allow the focus to shift from the overall cost to the quality of work being done. They cover all the expenses related to the project, so there are no surprises.
Cost Plus Contract Advantages Higher quality since the contractor has incentive to use the best labor and materials. Less chance of having the project overbid. Often less expensive than a fixed-price contract since contractors dont need to charge a higher price to cover the risk of a higher materials cost than
Contract Price = {Actual quantity of the Goods accepted by the Government} x {Rate/Unit Price quoted in paragraph 1(a) above}.
Disadvantages of cost-plus fixed-fee contracts may include: The final, overall cost may not be very clear at the beginning of negotiations. May require additional administration or oversight of the project to ensure that the contractor is factoring in the various cost factors.
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Average Markup for General Contractors? Most contractors are looking at a 35% margin; thus, a markup of 54%, or 1.54, is required. Subs typically have a gross profit margin of 50%; hence they require a markup of 100% or 2x.
There are three basic types of pricing arrangements in construction contracts: (1) stipulated sum (also known as fixed price or lump sum), (2) cost plus (with or without a guaranteed maximum or not-to-exceed price), and (3) unit price.
A cost plus contract guarantees profit for the contractor. It is stated in the contract that the contractor will be reimbursed for all costs and still generate a profit. Conversely, a fixed price contract establishes a projects price beforehand.
Unlike a fixed-cost construction contract, a cost-plus construction agreement is a contract in which the owner pays the contractor the actual costs of the materials and labor plus an additional negotiated fee or percentage over that amount.
For example, a contractor may stipulate that the employer pays them a percentage of labor costs, on top of being compensated for the cost of labor itself. Cost-plus contracts are most successful when theyre specific, and theres no such thing as too much detail.

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