Understanding Fixed-Price Proposals
A fixed-price proposal is one in which the contractor views the situation, assesses the amount of work and materials that are required, then quotes a single flat-rate price to complete the work. This type of proposal is also called a bid-style proposal or all-inclusive pricing proposal. The fixed-price proposal is almost always what is used with smaller projects. The occasional one-off repair or small remodel projects, such as water heater installation, dishwasher repair, or even floor installation, is simple enough that it is quite easy for a contractor to predict his own costs and quote you a flat bid for the work. Be aware, though, that contracts based on a fixed-price proposal will still include a built-in contingency fee that protects the contractor’s profit margin. Often this contingency is known only to the contractor. It amounts to an extra markup that allows the contractor to protect his profit even if unforeseen circumstances arrive. For example, an interior painter who has contracted under a fixed-price proposal may realize that he has miscalculated the amount of paint needed. Instead of charging the homeowner an extra fee for the added expense, the painter absorbs the cost through the contingency fee built into the bid. This contingency represents a normal, even necessary, part of doing business as a contractor. If the contingency is not used, this essentially becomes additional profit for the contractor. There is nothing illegal or unethical about this arrangement, though it does make sense for you to keep an eye on the materials being used in the work. The bid and contract will itemize the materials to be used, and any downgrade in materials should be discussed and approved by the homeowner. You will have the opportunity to see and make choices about materials and should be consulted whenever changes become necessary.
Understanding Estimate Proposals
In an estimate-style proposal, every labor activity and material in the project is listed in painstaking detail. You are billed for the materials used, actual hours worked, and work performed by subcontractors. The contractor’s fee is expressed in the form of a percentage of the project cost. This type of contract is also called a time-material or cost-plus contract. These contracts are the most transparent since you will see very clearly how much profit the contractor is making, but these contracts can be very large and complicated, since they may list hundreds of different line items. Nothing will be left out—not even peripherals such as portable toilets, roll-off dumpsters, permits, and debris pickup. Estimate proposals are characteristic of larger-scale projects such additions or home building. In fact, due to the complexity of these projects, it would be nearly impossible to issue a fixed-price proposal for such work. When assessing estimates from different contractors (standard advice is to solicit three bids), these types of contracts can be easier to compare, since the items should match up, one for one.
