Cost Plus Fixed Fee Contract Vs. Time & Materials Contract: A Brief Guide
Cost Plus Fixed Fee Contract Vs. Time & Materials Contract: A Brief Guide
When a client works with a vendor to develop a contract, they can structure the cost in various ways. The unit rate-based approach can use Time-and-Material (T&M) contracts or Cost Plus Fixed Fees (CPFF) contracts. The latter is based on the actual costs incurred by subcontractors along with the proven job costs reports, such as labor fringes, actual labor costs , equipment, and material invoice. It also considers the agreed-upon fees, either a fixed% or nominal fee on top of the actual costs.
Keep reading to find out more details about each contractual approach. To make things easier to understand, let's use the example of a large online retailer, X, who is preparing to build a new distribution center, and Y, a general contractor working on two different proposals curated using the different approaches being discussed for the same project.
Cost Plus Fixed Fee Contracts
As the name suggests, this method involves the clients being charged a fixed fee in addition to the project's overall cost. The fee is typically decided when the contract is negotiated and rarely changes, even if the project costs less or more than anticipated. The costs generally include the cost of labor and materials. It is easier to estimate the cost of materials in CPFF contracts. Still, the labor costs can be challenging to establish as vendors must account for indirect costs along with direct labor costs.
Since the overall price is guaranteed in CPFF contracts, as long as the project does not go beyond the defined scope of responsibilities and tasks, the costs will not change. The scope, deadlines, and specific phases are also usually clearly well-defined in such contracts. However, vendors often include the padded buffer zone means the client will probably pay considerably more for services than T&M contracts.
Moreover, these contracts are complex and take longer to prepare, leaving little room for flexibility or errors. The vendor will have to reprice the project based on the new expectations if the client comes down with a new set of requests beyond the initially defined scope.
