By far the two most common construction contracts residential contractors use are fixed price or open book contracts. Fixed price contracts, also known as lump sum contracts, are when contractors and clients agree to a set price for a project. This price includes all materials, labor, and markups and is only changed if clients exceed any allowances or select upgraded materials. The other type is open book contracts, commonly known as cost-plus contracts. These contracts charge clients directly for materials and add a markup to every item during the project so the entire project is treated as an allowance and clients see their costs accumulate throughout the project.
Both construction contracts have their advantages and disadvantages and CoConstruct construction management software supports both types. Because of this our team analyzed over 38,000 projects conducted using CoConstruct from 2018 to 2020 to determine how often and when contractors use one type of contract versus the other. In our findings, we saw that contractors overwhelmingly use fixed price contracts and are more likely to use them on smaller projects or when they have higher yearly project volume.
More projects, more likely to use fixed price contracts
Over the last three years the more homes home builders start a year, the more likely they are to use fixed price construction contracts. Builders making one to two homes a year on average use fixed price contracts 71.5% of the time while home builders working on three to four projects a year use fixed price contracts 77.2% of the time. Home builders working on 10 or more projects a year are the most likely to use fixed price contracts at 84.8%.
In our analysis of residential construction contracts, we found that this relationship between yearly project volume and the likelihood of using fixed price contracts has not only been constant over the last three years but has gotten stronger year by year. Home builders in 2020 who completed three or four projects were three and five percent more likely than their counterparts in the previous two years to use fixed price contracts. While this yearly growth is not as pronounced in other amounts of yearly project volume, the overall trend is still worth noting.
This relationship also holds true for smaller construction projects as well. The more yearly projects residential construction professionals complete under $250,000 a year the more likely they are to use fixed price contracts for their projects.
Like their larger counterparts, small construction projects have seen this trend grow over the past three years. Residential construction professionals in 2020 across all levels of yearly project volume were more likely than their earlier counterparts to use fixed price contracts. The one exception was contractors with 60+ projects in 2018 who used fixed price contracts 86.3% of the time compared to 83.2% of the time in 2019 and 84.5% of the time in 2020.
Majority of contractors use only one type of contract for their projects
From 2018 - 2020 the majority of contractors only used one type of contract for all of their projects as opposed to using a mix of fixed price and open book contracts. For projects that were larger than $250K, contractors were more likely to only use one type of contract. More than half of contractors with projects priced less than $250K also only used only one type of contract but less so than their counterparts working on larger projects. In 2020 contractors working on larger projects only used one type of contract 87.2% of the time compared to 61.2% for smaller construction projects. That gap between small and larger-sized projects has stayed relatively consistent from 2018 to 2020 even though every year both groups have steadily increased.
High priced projects more likely to use open book contracts
In analyzing projects in 2020, our team discovered when contractors are more likely to use open book contracts instead of fixed price contracts. For projects priced below $250K, 87.5% used fixed price contracts. For projects priced between $250K and $500K, that dropped to 76.3% and dropped again to 71.3% for projects priced between $500K and $1M. But the most precipitous drop came for projects priced above $1M where fixed price contracts were only used 54.2% of the time. Projects using open book contracts, conversely, were used more and more as the price point increased all the way up to 45.8% used on projects priced above $1M.
Where we got our numbers from
CoConstruct helps over 100,000 building professionals manage clients and trade partners, schedule work, track financials, and more. Aggregating and analyzing the data builders input into the system, CoConstruct can identify trends and highlight emerging issues in the residential construction industry. By using and sharing this information CoConstruct is doing its part to eliminate the chaos of project management and help create rewarding experiences for both home builders and clients.