Key Takeaways
- Fixed-price places cost risk on contractor for defined scopes.
- Cost-plus provides transparency for uncertain scopes.
- T&M suits small or emergency work only.
- Essential terms include draw schedule, CO process, retainage, and warranty.
Different contract types allocate risk differently between investor and contractor.
Process Flow
Three Contract Types
Fixed-Price: contractor bears cost overrun risk, best for defined scopes. Cost-Plus: investor bears risk but gains transparency. T&M: open-ended exposure, suit small/emergency work only.
| Type | Risk Bearer | Best For |
|---|---|---|
| Fixed-Price | Contractor | Defined scope, competitive bidding |
| Cost-Plus | Investor | Uncertain scope, trusted relationships |
| T&M | Investor | Small scope, emergency repairs |
Contract type risk allocation
Essential Contract Terms
Every contract must include: SOW, price, draw schedule, timeline, change order process, insurance requirements, warranty (1-2 years), dispute resolution, termination provisions, and lien waiver requirements.
Negotiation Priorities
Priority order: draw schedule structure, change order process, retainage, warranty, insurance/indemnification, dispute resolution. Use standard templates (AIA A101 or custom) rather than accepting contractor-provided contracts.
Key Takeaways
- ✓Fixed-price places cost risk on contractor for defined scopes.
- ✓Cost-plus provides transparency for uncertain scopes.
- ✓T&M suits small or emergency work only.
- ✓Essential terms include draw schedule, CO process, retainage, and warranty.
Sources
- AIA Contract Documents — A101 Owner-Contractor Agreement(2025-01-15)
- NAHB Remodeling Contract Guide(2025-01-15)
Common Mistakes to Avoid
Using time-and-materials contracts for defined renovation scopes
Consequence: No cost ceiling; contractor has no incentive to work efficiently and costs can exceed budget by 30-50%
Correction: Use fixed-price contracts for defined scopes; reserve T&M only for genuinely undefined exploratory work
Not including a change order process in the contract
Consequence: Contractor performs additional work and presents bills after the fact with no pre-approval or price negotiation
Correction: Include a formal change order clause requiring written approval before any scope additions, with cost and schedule impact documented
Test Your Knowledge
1.Which contract type gives the investor the most cost certainty?
2.What is the recommended retainage percentage for residential renovations?
3.What contract clause protects against contractor schedule delays?