Why Contractors Should Avoid Fixed-Price Contracts
Contractors have a lot of options when it comes to the contracts they sign, including those relating to payment. Each type of construction contract has its own strengths and weaknesses, but not all contracts are created equally. In this article, a Fort Lauderdale construction lawyer will explain why contractors should avoid fixed-price contracts at all costs. Remember, for assistance with all of your contract review, drafting, and negotiation needs, a Fort Lauderdale construction lawyer is standing by.
Risk vs. Reward
When it comes to construction contract trends, doing what is “in vogue” doesn’t always protect your best interests. Contractors are notorious for following the money, and when competition is stiff, the owner is the one that benefits. In other words, contractors are vying for a limited number of contracts, which means those willing to accept high-risk contracts are often those with the highest winning percentage. For the majority of contractors, this isn’t a sustainable way of doing business. You might feel pressured to sign off on fixed-price contracts, but you have to do what is best for your business. One way to do this is by having our Fort Lauderdale construction lawyers review your contracts before you sign on the dotted line.
More Certainty for Owners Means Less Control for Contractors
The main gripe with fixed-price contracts is that they fail to adapt to changes in scope of work. This opens up opportunities for owners to request changes that fit within the original terms of the contract. This can lead to financial issues for contractors as requested changes may exceed the contract price, resulting in negative cash flows and diminished credit ratings. What initially seemed like an opportunity to take on a project with high profit margins can later turn into a costly regret. When it comes to fixed-price contracts, the Sword of Damocles constantly hangs over the head of contractors, and if it falls, economic hardship ensues.
Common Issues When Working Under a Fixed-Price Contract
Sometimes, the owner is simply using a fixed-price contract as a method of controlling costs. They know they can afford “x” amount and they don’t want to extend their budget beyond that point. This is a rational reason to utilize a fixed price contract. You aren’t necessarily signing away your future when you take on a fixed-price contract, but you are opening yourself up to the possibility of this happening. The bad news is that it doesn’t take an unscrupulous owner to make you realize the downsides of a fixed-price contract. For example, labor issues, bad weather, and unforeseen project challenges can all lead to project delays. Let’s face it, projects never proceed without a few minor setbacks. With a fixed-price contract, even a miniscule disruption could lead to increased costs.
If you would like to speak with one of our Fort Lauderdale construction lawyers, please contact us today.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.