What Is the Difference Between a Cost-Plus and Fixed-Price Contract?

A Fixed-Price Contract Provides For a Flat Cost With Adjustment Only For Change Orders or Extras. A Cost-Plus Contract Provides For a Variable Price Based Upon the Expenses Incurred For Material and Labour, Among Other Things.

Understanding Contract Pricing Options Within Common Business-to-Business or Business-to-Consumer Relations

Contract Document Generally, the pricing structure for most contracts used within business contracts is based upon either the fixed-price method or the cost-plus method.  Such arrangements are common regardless of whether the contract is within a business-to-business relationship or a business-to-consumer relationship.

The Law

The legal explanations for fixed-price as well as cost-plus arrangements were well explained in the case of Balmoral v. Biggar, 2016 ONSC 319 wherein it was said:

[9]  Construction contracts fall into two basic types: contracts for a fixed price and contracts in which the price is based on time spent and materials used (also referred to as "cost plus" contracts). In a fixed price contract the contractor assumes the risk of bringing the project in at a cost that will cover the contractor's expenses overhead and profit. If the project comes in on budget then the contractor achieves a profit. If the project is over budget then the contractor absorbs all of the losses and the owner is protected by the contractually fixed price. The owner shoulders none of the risk in a fixed price contract.

[10] In a cost plus contract the risk lies with the owner. The contractor charges the owner based on the contractor's actual costs for labour and materials, to which is added an agreed upon percentage for overhead and profit. The contractor bears no risk of losing money on the project but the owner has no guarantee of the total contract price. In a cost plus contract the contractor must keep track of all costs, including labourers’ hours, hourly rates, the employment burden, proof of costs for materials and other items.

Interestingly, where a contract is based upon a fixed-price and thereafter extras arise as goods or services uncontemplated within the original contract, dispute commonly arises a to whether the extra is a genuine extra or is a concern that should be included as contemplated within the original contract.  The case of Curran et al., v. Queen Milling, 2021 ONSC 2731 provides insight on how extras are addressed whereas, in Curran, the concern arose where a fixed-price contract for the removal of asbestos, among other things, gave rise to disputed extra charges when unanticipated asbestos was discovered during the process of abating the anticipated asbestos.  In Curran, where charges should be due for extras was explained where it was stated:

[32]  Both parties refer me to Proxema v. Birock, 2018 ONSC 2553 (CanLII), QMI relying on McCarthy J’s comments in paragraph 120 and Curran on the comments in paragraph 118.  I include the full statement of the law made by McCarthy J. at paras 118-120 as follows:

[118]  The Alberta Supreme Court set out what constitutes valid extras to a construction contract in Chittick v. Taylor, 1954 CanLII 492 (AB QB), [1954] A.J. No. 23:

When a contractor performs work or supplies materials not called for by the contract without instructions, express or implied, from the owner, or the consent of the owner, it is not entitled to charge for this additional work or materials as an "extra". However, when the contractor performs work or supplies materials not called for by the contract on the instructions, express or implied, of the owner, it is entitled to charge for additional work or materials as an "extra". What amounts to instructions from the owner depends on the circumstances relating to each item. If the owner, without giving definite instructions, knows that the contractor is doing extra work or supplying extra materials, and stands by and approves of what is being done and encourages the contractor to do it, that will amount to an implied instruction to the contractor, and the owner is liable [citation omitted] (Catan at para. 13).

[119]  I adopt that passage as an accurate statement of the law of construction extras. Where an owner has knowledge that extra work is being done and fails to object, but is passive, he is deemed to be acquiescing and is thus liable to pay the contractor for that work.

[120]  The law is clear that extra work entitling the contractor to additional payment must be work which is substantially different from, and wholly outside the scope of the work contemplated in the contract: see Ron's Trenching & Hauling Ltd. v. Estevan (City) (1985), 11 C.L.R. 148 (Sask. Q.B.) at paras. 8-9, citing with approval Goldsmith, Canadian Building Contracts (3rd ed., 1983), p. 83.

Summary Comment
Fixed-Price

A fixed-price contract involves a specified amount of payment that is independent on the amount of resources or time expended in performing the contract.  Stated simply, a fixed-price contract is a contract in which the required final price is the price originally set without variance.  The payment required is as per the final price agreed at the outset of the contract.  Fixed-price contracts work when the costs are well known in advance and thus predictable with reasonable accuracy.

Cost-Plus

A cost-plus contract, also known as a cost reimbursement contract, is intended to include the costs of performing the contract plus a specified profit (usually a percentage).  A cost-plus contract arrangement is often used with government contracts to put cost over-run risks onto the buyer (government).  This is especially common for contracts involving innovative projects with untested or undeveloped technologies such as new military equipment where an estimate failure may lead to costs greatly exceeding the financial capacity of the producer.

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