Engineering and Construction

With  fixed  fee or  lump sum compensation, the contractor or other construction entity is paid a fixed dollar amount to complete the construction of a project regardless of that entity’s actual costs. With this compensation method the owner begins construction with a known, fixed construction cost and assumes minimal risk for unanticipated increases in cost. On the other hand, the construction contractor assumes most of the risk of unforeseen costs but also stands to gain from potential savings. Fixed fee compensation is most suitable to projects where the scope of the construction work is well defi ned at the time that the construction fee is set, as is the case, for example, with conventional design/bid/build construction.

As an alternative, compensation may be set on a  cost plus a fee basis, where the owner agrees to pay the  construction entity for the actual costs of construction—whatever they may turn out to be—plus an
additional fee. In this case, the construction contractor is shielded from most cost uncertainty, and it is the
owner who assumes most of the risk of added costs and stands to gain the most from potential savings. Cost
plus a fee compensation is most often used with projects where the scope of construction work is not fully known at the time that compen-sation is established, a circumstance most frequently associated with con-struction management or design/build contracts.

With fi xed fee compensation, the builder assumes most of the risk related to unanticipated construction costs; with cost plus a fee compensation, the owner assumes most of this risk. Between these two extremes, many other fee-structuring arrangements can be used to allocate varying degrees of risk between the two parties.