When we receive a call from potential clients looking to build a restaurant, the same question is often asked: “so, how much will this cost?” While cost is a significant factor in any project, the rush to settle on an exact monetary amount often leads to what we believe is one of our industry’s worst practices: the fixed-price contract.
A fixed-price contract, also known as a stipulated price contract—or here in Canada, a CCDC 2 contract—is when the contractor and the customer agree to a fixed price to complete the project. How the contractor finishes the build is often overlooked, as long as the agreed-upon price is met.
We’re not saying that stipulated price contracts don't have a place in construction, but we just don't think they should be used in tenant improvements, especially not in restaurants.
When it comes to building restaurants, our main issue with fixed price contracts is a lack of transparency that often only benefits the contractor. Any experienced contractor understands that no matter how much pre-planning expertise and construction experience they have, there will always be a variety of uncertainties when it comes to the build that can potentially add cost to the project. Because of this, most contractors will build a significant amount of margin or contingency into the final price.
Since there is no incentive for contractors under a fixed price contract to be transparent with the cost breakdown of a project, if everything runs smoothly, the contractor's actual costs will be well under the fixed price (which was inflated due to potential uncertainties). As a result, the contractor will enjoy a considerable profit margin for the project. In other words, the customer ends up overpaying.
Now, you might be thinking, “what if circumstances arise that drive the cost past the fixed price? Doesn’t that mean I’m getting a better deal?” Unfortunately, the answer is no. Here’s where Change of Work Orders and “project creep” come in.
When a project runs over budget, a contractor will simply create a Change of Work Order, essentially asking for an increased budget despite the previously agreed upon “fixed price.” One reason contractors can do this is because they know that it is doubtful that a customer will go through the hassle of finding a new contractor mid-project, so they have no choice but to accept the new price.
People seek out fixed-price contracts believing that they are working with a contractor to set a maximum price on the project. However, in reality, these contracts will allow for future changes to the scope and cost. Unfortunately, the contractor is the only party that benefits from this type of payment agreement.
When we mentioned how some contractors would build in a substantial margin or contingency to account for the challenging task of building a restaurant in Vancouver, these are actually the rare ones. Instead, most contractors come up with a low number to undercut other companies bidding for the same job, knowing that upon getting the job, they can use Change of Work Orders to bring the project to its actual cost.
The mistake most restaurant owners make is focusing too much on the end price without understanding how to get there. If you go to a steakhouse and ask the waiter to bring you whatever the most affordable meal on the menu is, you’re probably not going to get the best quality steak. You might not even get steak at all.
With over a decade’s worth of experience working with restaurateurs, we know that most of them are skilled at dealing with numbers. We understand that you can't run a successful restaurant without a keen eye for the details; the money is made (or saved) in the margins. We haven't met many restaurant owners who don't want to know the pricing and be involved in building their restaurant.
Any contractor that says they can guarantee a restaurant can be built for a predetermined price is either overcharging you, lying and planning to hike up the price later, or just inexperienced and naive. We believe that the key to any successful working partnership is to make sure both sides are working together to understand where and why the money is spent.
At Mercury Contracting, we have a unique pricing and accounting model that our clients appreciate.
Give us a call to learn more about how we can work with you on your next project. We are happy to explain how we perform accounting, track your costs, and how we will manage your project. Our goal is to allow you to rest easy knowing that your project has been delivered at a fair market price and proper steps have been taken to be as cost and time-efficient as possible.
We are on your team and will work with you with complete transparency to best deliver a finished project that we are all proud of and excited about.