Comparing Contractor Pricing Models

Why Fixed Bid Pricing can save you thousands of dollars during your remodel.

When talking with contractors about your remodel, you’ll likely hear a few different terms when they talk about how they price their work: Time and Materials, Cost Plus, and Fixed Bid.

Each of these types of pricing can have a large impact on both the quality of the work and the final cost of the project. Understanding how each of these work is a crucial part of deciding who to work with. We’ll outline how each system works and list some pros and cons of each system below.

Time and Materials

With a time and materials bid, a contractor gives an estimate for how long the job will take and an estimate for the cost of materials it will take to complete the job. Materials and labor are marked up by a percentage to create a profit for the contractor.

This can be a great system when you have an efficiently planned project. If your project has a lot of unknown variables, time & materials bids can allow for quick changes during construction. If your project is very straightforward or if your contractor has completed similar jobs many times, they may be able to give a relatively accurate price range when estimating the work.

However, there are several downsides with this system, especially if your contractor is less experienced. Because the “clock is running” for as long as it takes, there is little incentive to plan out the project in detail, work efficiently, or use materials that keep costs down. Time & materials bidders may hire unskilled or underpaid labor because it increases their profit margin on the job. Worse, without a robust tracking system with dedicated staff, system lends itself to blindsiding homeowners with cost overruns at the end of the job.

A contractor may underbid on the job (to either win the job or because they don’t know what it will really cost) and then end up hitting you with a much larger bill when the job is completed. Because there isn’t typically much planning ahead of time, you may be asked to make quick or last minute decisions about the materials and design of your project. That adds an extra element of stress to the process that could be solved with planning up front.

Pros: 

Time and materials jobs, when efficiently managed and run by pros, can potentially cost less than other pricing models.

This type of pricing is more flexible than other models. It can accommodate changes in scope during the project easily.

This type of pricing works well for jobs that don’t have a defined scope. If speed is your priority, this model can allow for a quick start.

Cons:

There is a lot of uncertainty about what the finished product will cost. 

You don’t know what the actual costs of the project are.

Because these bids are easier to make, many less experienced builders use this model. 

Builders are often less skilled or underpaid to increase margins.

Time and materials bidders can inflate the actual cost of materials to increase their margins.

Because profit is built into the time and materials, costs can balloon as the job takes longer than expected or as change orders are made.

If your project takes longer or costs more than expected, your contractor makes more money.

The most common appeal of time & materials bids is that the initial estimate is much lower than other bids. Because a T&M bid doesn’t require much preparation to give, many companies give quotes that are much lower than they should be.

Once you’ve committed to the job, the builder doesn’t have the incentive to work efficiently or keep your costs down. Costs can balloon out as the job continues, and you end up paying just as much as you would have with a more experienced company using an alternate method of pricing.

That being said, a time & materials bid is not inherently bad. With enough forward planning, they can provide flexibility to the customer and a more realistic estimate of what the completed project will cost. This type of agreement requires a lot of trust and a lot of communication with your builder. If you’ve worked together in the past and have received on budget and on time work, you’re much more likely to have a successful remodeling experience with a time & materials bidder. If not, buyer beware.

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