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What’s In a Bid?

When securing bids from contractors, you may hear different contractors talking about different types of bids. Here’s the lowdown on the three main bid styles: cost-plus, guaranteed maximum price, and fixed price.

1. Cost-plus (also known as “Time and Materials”)

In a cost-plus bid, contractors submit what they expect to be the wholesale cost of the job plus a percentage fee (their profit). While this fee is predetermined, the cost can be variable. These types of bids typically result in better quality materials since contractors simply passing the cost of the high-quality materials on to you. Yet, the caveat is that a cost-plus bid doesn’t work well if you’re on a strict budget. This is because under cost-plus bids, contractors have no incentive to control costs, and unscrupulous contractors may dump in extra costs.

2. Guaranteed maximum price (GMP)

GMP bids require contractors to agree in advance that the total cost of the project will not exceed a specified figure, with a little wiggle room built in. A “savings clause” provides a bonus percentage to the contractor if the job comes in below the maximum allowable cost.

GMP bids are great for renovating on a budget. Here’s the catch.  If a job ends up coming in well under the maximum price, the contractor may actually stand to make more money by charging you the maximum price and ditching the “savings clause” altogether. This creates a disincentive to provide an honest maximum cost.

3. Fixed-price

Fixed-price bids, the most common type of bid, is what it sounds like: the total price of the project is locked in upfront, barring change orders.  In essence, you set a budget and the contractor determines if they can complete the scope of work for that amount. This type of bid is also great for renovating on a budget, and protects you from surprise spending if the cost of building materials rise significantly.

However, if unusual market situations occur, such as natural disasters causing a dramatic increase in the cost of materials or labor, the contractor may have to renegotiate the fixed-price or, worse, be unable to complete the project and walk off the job.

There are right bid styles for your project and wrong bid styles for your project. If you are unsure what type of bid you’ll receive from a contractor, ask them!

Lastly, here’s a tip: contractors that are truly interested in completing your project and not just taking your money will pitch their bid in person and walk you through it.