Contractors can charge for their work in many different ways depending on the project, industry standards, and their particular business model. Here are the most common ways contractors charge for their work.

{VIDEO}

READ THE TRANSCRIPT AND ADDITIONAL NOTES BELOW

Fixed Price / Flat Fee 

In this approach, the contractor provides a fixed price / flat fee or a percentage of the total project for the entire project. Generally the same conclusion, but should the budget change, the contractors fees do not. Their fee/price is agreed upon upfront, after considering the scope of work, materials, labor, and other factors, and is distributed over the number of assumed months of the project. 

This method gives you a clear understanding of the total cost of the Contractor from the beginning, regardless of any potential variations in labor or material expenses, and puts you in charge of paying your bills instead of paying back your Contractor.

It typically goes like this…
The contractor will give you a budget and include their overall fee/price. They will take that price and divide it by the number of months they estimate the project will take. Should the budget increase* or the timeline extends, their price doesn’t change. *Scope change does not apply.

Ex. Price = $120,000 / 24 months = $5,000 per month. You pay your bills.

Percentage of Project Cost

A similar approach to a Fixed Price / Flat Fee pricing with the price based off of the project total however, depending on the contract, should the overall project price change, the Contractor’s price may change as well. In any situation, be sure to review your contract. Ensure that the percentage fee is clearly defined and agreed upon to avoid any misunderstandings or disputes and who pays the invoice directly.

This hybrid approach straddles a Fixed Price / Flat Fee and a Cost Plus. Find out which it favors.

Cost Plus

In a cost-plus pricing model, the contractor charges for the actual cost of labor, materials, and other project-related expenses, along with an agreed-upon percentage or fixed fee. You can see the actual costs incurred on the project plus payment for their services. You are not paying each individual invoice. Your contractor is paying on your behalf and you are paying your contractor's invoice. 

Generally, this would mean that if the project price increases, so does your Contractor’s fees. Just like Percentage of Project Cost, check with your contract to determine if that is the case or if it is dependent on the circumstance.  

It typically goes like this…
The Contractor pays all of your bills and invoices you for the cost of those bills plus a mark-up to cover their services and any incidentals (interest on unpaid amounts, etc.).

Ex. Invoices you $50,000 for bills paid for your foundation plus $5,000 (10%) for his/her services. Totalling $55,000. 

Time and Materials

With this pricing method, the contractor charges for the actual time spent on the project and the cost of materials used. The contractor provides an hourly rate for labor and provides invoices for materials separately. 

Contractors who invoice by the hour must meticulously track their time and assure that they provide documentation to justify any invoicing. As for the materials, this generally is similar to the Cost Plus method where the Contractor pays for materials and you pay him/her back with an agreed-upon percentage or fixed fee (a lot lower than Cost Plus).

This approach allows for flexibility, but it can make it challenging to estimate the final cost until the project is completed.

It typically goes like this…
The Contractor pays all of your bills and invoices you for the cost of those bills plus a small mark-up to cover any incidentals (interest on unpaid amounts, etc.) and invoices you for the hours he/she worked on your project.

Ex. Invoices you for the hours spent on the project (40 hrs. @ $125/hr. = $5,000) and for the bills paid plus ($49,000 + 2% = $50,000). Totalling $55,000. 

It's important for you to discuss and clarify the pricing method with the contractor before starting the project. Carefully review the contract terms, including defining the scope of work, implementing change order procedures, setting spending limits or caps, and how you’ll regularly monitor and review the project's progress and costs. 

Establish clear expectations and transparency in your Contractors pricing.

Now it's your turn 👉🏼 Tell us which pricing method your Contractor uses. Take our poll.  

Have questions? Does your Contractor uses a different method if pricing? Maybe a hybrid of the pricing we listed above? Tell us in the comments below. 

Once you've worked with your Contractor, come back here and let us know what you thought of it!