Office Fit-Out Contracts
Are you in the planning stages of an office fit out, and conducting due diligence on several design & build companies? Perhaps you’re preparing an office fit out business case for your company?
If you’re in either of these situations, you’ve probably heard about the various types of fixed and variable cost contracts. You may be wondering which is most appropriate for you. If so, you’re in the right place.
We’ve been designing & building workspaces in London and across the UK for 15 years. We’ve worked on a wide variety of project sizes and scopes, as well as contract structures. As a full disclosure, we only operate on fixed-cost contracts. However, this article is not to convince you to use a fixed-cost contract. It’s to educate about the different types of fit out contracts available and help you make the best decision for your needs.
In this article, we’ll explain the 5 contract structures that are most relevant to office fit out, including their respective pros and cons. We’ll also break down the 5 key criteria that will impact which is the best option for you.
Design & Build or Design-Bid-Build?
Before we can explain the different types of office fit out construction, it’s important to decide on your overall office fit out model. The two main options for this are tender or design & build. This will change what is possible or most suitable for your project.
The most common for office fit out is design & build. Under this model, you work with 1 or more design & build companies to create a design that meets your needs in a “pitch to win” scenario. You then award the project to the most suitable contractor.
Tender or paid design is the more traditional construction contracting model. Under this structure, you work with one design & build company to create a full tender pack that contractors can quote on. You then get several contractors to quote on the same design.
For a more in-depth explanation of how each model works and which you should choose, read Paid Design Vs Pitch Design – Which is Best For Me?
Construction Contract Types
There are many different types of contracts used in construction, but not all are suitable for fit out projects. Some fit out companies may not offer all of these contracts as an option for your project. In this section, we’ll walk you through the 5 most common contract types for office fit out, and their respective advantages and disadvantages.
Fixed Cost/ Lump Sum Contract
A fixed contract, also known as a lump sum contract, is the most common contract type used in office design & build. This contract establishes one pre-agreed price for all the labour and materials required for the entire project. This is then paid in several (contractually stipulated) instalments throughout the project.
Unlike variable cost contracts, lump sum contracts do not require intensive supervision from the clients. The specification, cost, and timeline are agreed. The design & build company is then responsible to deliver the project according to the agreement. However, your input will still be required for decisions and feedback.
These contracts are especially suitable for mid-size fit outs, with a clearly defined scope of work. While it may be known as fixed cost, this doesn’t guarantee the price you pay. Changes you ask for will likely be chargeable, and there may be exclusions in the terms and conditions.
Advantages
The main advantage of the fixed cost contract is in the name. Fixed cost contracts provide much greater cost certainty than other variable cost contract structures. This makes it much easier to compare proposals and quotes from multiple design & build companies. They are much simpler and easier to digest, as they have fewer variables than cost-plus estimates.
Disadvantages
However, a lump sum contract is not perfect. It often requires more preparation and planning. This means it’s not practical if you’re not entirely sure of your needs before the start of the project. It also involves more risk for the contractor, which will lead to increased contingency costs.
Cost-Plus Contract
A cost-plus contract is the other common form of contract used in the office design & build industry. Often known as an ‘open book’ policy, it involves you reimbursing your contractor for all costs they incur, along with a pre-agreed markup percentage – typically between 10 and 30%. Billable costs include both direct costs ( labour, materials, etc.) and indirect costs (overhead cost contributions for the contractor).
Importantly, the contractor cannot charge for costs without justification – they have to provide evidence. The contractor will also need to provide an estimate before the project starts, to give you an understanding of rough costs.
Typically, they are used for projects where there is a high degree of uncertainty as to the scope. They are also used for very large long-term projects where there are too many variables to provide an accurate cost before the start.
Advantages
The main advantage of a cost-plus contract structure is the flexibility it provides - you can adapt the project scope as you proceed. They are also sometimes cheaper, as the contractor needs less contingency.
Disadvantages
A cost-plus contract does have several significant disadvantages for you as a client. There is very little certainty as to costs before you start. This makes it very difficult to budget and could lead to conflict between you and your competitor. Managing these projects is also very time-consuming. Verifying all expenses takes a lot of time on top of project decision-making and feedback.
Incentive Construction Contract
Incentive construction contracts are a variation to both lump sum and open book contracts. Over and above the initial contract agreement and project estimate, the client and contractor agree on incentives for the contractor.
These take many forms and can be both positive and negative. They typically apply to delivering the project before time. In the case of open book contracts, they can also apply to costs. They are most commonly included in fixed-cost contracts as liquidated and ascertained damages (LADs). These are financial penalties payable to the client for late delivery.
Advantages
The primary benefit of an incentive construction contract is that it encourages the contractor to deliver the project before time and/or below cost – both of which are very valuable to you as the client.
Disadvantages
Negotiating these incentives can be complex and time consuming. They may also encourage your contractor to cut corners on both specification and scope to reach the incentives – which would reduce the quality of your finished workspace.
Guaranteed Maximum Price (GMP) Contract
A guaranteed maximum price contract is a hybrid of both fixed-cost and cost-plus contracts. It is a cost-plus contract with an upper cost limit for the client. Beyond this, you will not be charged for costs incurred by the contractor. They will obviously see their profitability reduced as a result, so they are incentivised to complete the project on or below budget.
Because of the cost cap, there is a lot more preparation involved to improve the cost certainty and mitigate risk for both you and the contractor. In addition, many such contracts stipulate the client can review the contractor's costs to ensure fairness.
Advantages
The key benefit of a GMP contract is that you maintain most of the flexibility of a cost-plus contract without the risk of an open-ended project budget. This reduces the risk and uncertainty of your project massively.
Disadvantages
Because a GMP contract has a cost cap, you will need to spend a lot longer planning the project so that you and the contractor can set an appropriate level for that cost cap. Like a cost-plus contract, it is also very time-consuming to manage.
Time and Materials
Time and materials contracts enable contractors to charge you for material costs and pre-agreed daily or hourly labour rates. Their overhead costs and margin will be built into both material and labour costs. It is often confused with cost-plus, but there is a crucial difference. You are not aware of the profit that the contractor is making, as it is not on an open-book basis.
These contracts are typically used for very small projects and churn works. These projects have a disproportionately high labour cost, and often uncertainty. Splitting labour and materials makes the variations in cost more predictable than a unit cost basis.
Advantages
The main advantage of a time and materials contract is flexibility. A contractor can attend site and make the changes necessary without intensive planning, and then charge for the work completed. This is why it is especially suitable for churn works that don’t have a certain scope.
Disadvantages
The unavoidable downside of flexibility is uncertainty – the costs may vary hugely and unpredictably for you. Time are materials contracts are also very complex and time-consuming to manage for larger projects.
Which Contract Type Is Best for Me?
Fixed cost and cost plus are by far the most common contract structures for office fit-outs, renovations, and relocations. However, just because they’re the most common, that doesn’t necessarily mean they’re right for your company. Here, we’ll run through the key factors that will influence which is the best contract option for you.
Scope & Size
The primary consideration is the scope and size of your project. These two factors together matter because they control the complexity of your project. Certainty of scope is also crucial. While fixed cost is often the best option, it will not be possible if you do not know the exact scope of works before you start.
A simple scope such as redecoration, may be suitable for a time & materials contract, even over a large area. However, a complex scope, such as replacing the HVAC will likely need a fixed cost or open-book contract, even for a small space.
Cost
The size investment will also impact the best contract. More complex and restrictive contracts are typically necessary for larger projects. Time and materials contracts tend to be best for very small projects or churn works of £50,000 or less. Fixed cost or open-book projects tend to be the best option for mid to large projects of £50,000 to £5m. For very large projects of £5m or more, an open book contract will probably be best. Incentivised contracts may also be relevant.
Some contract structures tend to be more cost-effective than others. If your project is coming over your available budget, you may want to consider taking the open-book contract route. However, this will involve taking on more risk. You shouldn’t make a decision based solely on cost.
Risk
Risk is closely linked to cost in all contract structures. Contract structures that require the contractor to take on more risk will inevitably have a higher cost, as they need to allow contingencies accordingly. While a cost plus contract may appear cheaper, it may rapidly become more expensive if not carefully managed.
More flexible contracts typically contain a lot more risk than fixed-cost options. Open-book and time & materials contracts leave you exposed to fluctuations in the cost of labour and raw materials, especially if your project will take 6 months or more to deliver. If your project does not have a fixed cost cap, you could leave yourself exposed to huge cost overruns.
Time Commitment
Many companies underestimate the amount of their time needed to plan and assist in their office fit out. As well as planning the project and briefing potential contractors, you will also be needed for feedback and decisions throughout the project.
The flexibility of your contract is the crucial factor that determines the amount of your time required for the fit out. Fixed cost and GMP contracts will take more of your time to plan, as all the uncertainties need to be removed before the works can begin.
More flexible contracts require less of your time in the planning phase. However, you will need to be much more involved in the delivery phase, not only making scope and design decisions, but inspecting and review contractor costs. Typically, less flexible contracts will require less of your time over the course of the entire project.
Choosing Your Design & Build Contract
Only you know the exact needs of your company and your upcoming project. We can only help you understand the options, their respective options, and key considerations points that will help determine what is the right contract structure for you.
The major choice you need to make is whether a fixed or variable contract is best for you. If a variable cost contract is your preferred option, you can then decide which exact type. The key factors impacting your decision will be the size of your project, the certainty of scope, and the level of risk you are prepared to bear.
If you do decide that fixed cost is the best option for you, it's important to study the terms of the contract, as not all fixed cost contracts are created equal. Construction projects are notorious for hidden costs. Some companies will exclude certain elements from the fixed cost guarantee or not accept liability for their cost miscalculations. Others will not include certain parts of their design in the cost, and then add it as a chargeable extra during the project.
At Zentura, unlike many companies in the industry, we provide a fixed-cost guarantee. This means that we don’t charge you for any changes you don’t request. Missed or miscalculated costs are our problem, not yours. As a result, you have much more cost certainty and lower risk throughout the project.
If this sounds like something that’s important to you, feel free to book a call with one of our workspace experts. We’d love to help you create the workspace you need in the lowest risk, least disruptive way possible. Contact us here.
If you’d to know more about choosing a design & build company that is right for you, read How to Choose the Best Office Fit Out Company For Your Project. We’ll go through 5 key criteria that you need to consider when choosing a fit out company, and how to make the best decision for your unique project and needs.
