Two Main Types of Construction and Renovation Contracts - Pros and Cons

Understanding the different types of renovation or construction contracts before embarking on a renovation project is critical. Here are the most common types of contracts explained with the pros and cons from the owner’s perspective.

Fixed Price Contracts

The benefit to the owner when entering into a fixed price contract with a general contractor is cost certainty. However, the owner must have made most of the design decisions, in advance, in order to qualify for a fixed price contract.

The owners and their consultants identify suitable general contractors and administer to a competitive bidding process, once construction drawings and/or a building permit is issued. General contractors (GC’s) assume entire responsibility for the project and provide warranties for the future performance of the work. The GC manages the entire project with little day to day involvement of the owner.

Project Management Contracts

Most owners of residential construction projects are inexperienced and cannot contemplate all design decisions beforehand. A Construction Management contract relieves the pressure.

A Project Manager (PM) is operating at all times as an agent of the owner. The responsibilities of the project manager starts with a collaboration with the principal designer/architect to achieve the most cost effective design which fulfills the owner’s objectives and is within the owner’s budget.

Once the project begins, the PM’s principal duties are to secure bids from the various sub-trades, provide job management and scheduling, perform general administration and accounting functions as well as conduct quality control inspections for the purpose of approving the owner’s payments to the sub trades.

The Project Manager performs the dual role of the lead player for the owner but also has to balance the interests of the sub-contractors. The PM should be the owner’s trusted advisor, through what is a very complex and financially risky undertaking.

The principal benefit to the owner with this type of project delivery method is the gain of the collaborative team approach. This allows the owner to participate in design decisions during each phase of construction, when most people are in a better position to understand the complexities. However, the owner gives up most, if not all, cost certainty and assumes the risk of contracting directly with the sub-trades. Typically a Project Manager will charge 10% to 15% of the overall project cost.

The Best Type of Contract?

What is the best contract type? There is no easy answer. An owner should look at their reality first. If one has the disposable time and knowledge of construction, perhaps a Project Management contract is best. If the owner has no time, but knows exactly what the final product should be, a Fixed Price Contract will work best.

Other Types of Construction Contracts

  • Time & Materials

This works best for smaller jobs where the hourly rate for labour is clarified and is agreeable to both parties. Materials are purchased by the contractor and are marked up 10% to 15%, to the retail value of the actual goods. A Time & Material contract should not be considered for large projects, unless the trust level between both parties is very strong.

  • Fixed Price plus Allowances

This contract works best where the main aspects of the project are clearly specified, but the finishing details remain undecided. For example, an addition at the rear of house with the dimensions and room sizes is known, but kitchen and flooring type are not yet determined. The contractor can provide a fixed price on the “known quantities” and provide an “allowance” price for yet to be determined finishing details. This allows the owner to make interior design decisions as the project progresses, when they are better able to visualize the space.

Fixed Price Contracts

PROS

  • Cost certainty.

  • Warranties are provided by G.C.

  • Only one person/company for the owner to deal with.

  • All risk for scheduling, safety and quality control rest with contractor.

  • Owner can effectively deal with their own personal business, on a day to day basis.

CONS

  • Possible quality control shortcuts.

  • Requires owner to decide on details up-front.

  • Change of design mid-way through the project could result in costly extra charges.

  • Will be more expensive than a project management contract as contractors are more likely to have a large contingency built into their estimate for unforeseen risk.

  • Possible difficulty in obtaining “free” estimates – time consuming for contractors to provide estimates.


Project Management Contracts

PROS

  • Allows for collaboration of decision making

  • Allows the owner to make decisions in “real time” other than up-front where it is hard to visualize

  • Could be the least expensive, as no contingency is built in for risk.

CONS

  • No cost certainty of total project cost

  • No overall warranty

  • Very spotty service from trades upon project completion

  • Homeowner becomes contractor and is ultimately responsible for site safety

  • Homeowner must be registered by WSIB

  • Homeowner may not have time and availability to work with Project Manager.

  • Could be the most expensive if their Project Manager is not trustworthy.