Generally speaking, any time any construction takes place, that construction relationship is recorded by way of a contract. Namely, a document that sets out each of the parties’ roles and responsibilities, the scope of said roles and responsibilities, the timeline associated for the performance of those responsibilities, and the price for which one party will pay the other.
Insofar as payment is concerned, one of the most common types of arrangement for price is the fixed price contract (also referred to as stipulated price or lump-sum contracts). As the name suggests, a fixed price contract offers a ‘fixed price’, meaning a fixed scope of work for a predetermined price. These are opposite of costs-plus, in which the contractor agrees to provide a set scope of work in exchange for charging the homeowners their cost of materials and labour, plus an overhead and profit on top of said costs, or time-and-materials contracts (which are self-explanatory).
The Benefits of Fixed Price Contracts
A fixed price contract is generally favored by the owners as it provides comfort in granting a maximum predetermined price to be paid. This prevents any unpleasant surprises in the form of additional costs or charges to the owner for the scope of work that was agreed upon at the outset of the project. Conversely, contractors do not like this form of pricing as it results in the contractor bearing the risk of fulfilling the scope, regardless of their final cost of the project.
A fixed price contract has some benefits to the contractor, namely in allowing for a budget that considers the contractor’s access to discounts for materials, personal labour expertise, and speed of completion of the project. This also allows contractors to calculate their own related mark-ups and include pricing for marketing, promotion, and other costs that would not be related directly to the project. Ultimately, contractors can therefore use fixed price contracts to freely pocket any differences between the fixed price charged to the owner and the final cost of the project once they complete the scope of work for the project. While this practice is not looked down upon, it is a good reminder for owners to exercise care and diligence by obtaining several quotes from different contractors, in order to not sign a fixed price contract that would include non-construction related costs.
Consequences of Fixed Price Contracts
While there are benefits to the fixed price contract as set out above, there are corresponding consequences. Namely, in the event of cost overruns for a contractor, a contractor could be prevented from increasing the price and having to “eat” the difference. This runs the risk of contractors paying for projects out of pocket. Even where the language of the contract allows for some leeway for price escalation, the Consumer Protection Act, 2002 further limits any price escalation (on residential projects) by precluding contractors from increasing such prices by more than ten percent.[1]
Similarly, in the event where an owner discovers that the actual cost of construction is significantly cheaper than the contract price, such owners would be precluded from demanding the contractor to itemize and provide evidence of such information. This concept has been recognized and re-enforced by the Courts on multiple occasions. Particularly, in Balmoral Custom Homes v. Biggar, Master Albert (as she was then) remarked that, in the case of fixed-price contracts, “the parties [agree] to a fixed price for the specified scope of work. Whether [the contractor] made a profit on the contract or lost money on the contract is irrelevant. It is a fixed price contract. The contractor is entitled to the benefit of bringing the project in under budget and has no obligation to disclose actual costs…. had [the contractor’s] actual costs exceeded the fixed price [the owner] would not have been required to pay any amount above the Contract price for items included in the scope of work under the Contract”[2]
Similarly, in Anand v. The Queen, the Court emphasizes the rationale and policy pertaining to fixed price contracts. Namely, the Court confirms that, “the hallmark of a fixed price contract is the idea that, in offering a fixed price, the contractor bears the risk of diminished profits if the costs of the project are higher than anticipated. Correspondingly, a higher profit will be earned if the costs wind up being lower than anticipated. Regardless, the client is not concerned with how much profit the contractor earns as he is protected by the fixed price, on which the profit earned by the contractor has no impact.”[3]
Conclusion
Fixed price contracts have been around forever and will most likely be here to stay. However, that does not mean that this form of pricing is the best for everyone’s specific contract. For more information and bespoke advice on whether your project would benefit from fixed price modeling or other pricing, feel free to reach out to the FPC!
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] Consumer Protection Act, 2002, S.O. 2002, c. 30, Sched. A, s. 10.
[2] Balmoral Custom Homes v. Biggar, 2016 ONSC 319 at para. 15.
[3] Anand v. The Queen, 2019 TCC 119 at para. 47.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
