Fixed billing or time billing?

When determining the pricing for a construction project, project owners need to decide whether they’ll use a time and material pricing model or a fixed one. There are major differences between the two, and the answer depends on several factors, including the contractor-owner relationship and risk mitigation strategies. Here’s an explanation of what each model looks like in a real estate development project.

What is Fixed Billing?

Sometimes called lump sum billing, fixed billing is when you charge a predetermined, total amount for the entire project, regardless of how long it takes to complete. Project owners calculate the price of materials and labor and agree not to exceed a certain cost. If a project is completed early, bonuses or other incentives might be worked into the contract. 

It’s common for clients to prefer this method of billing as it provides peace of mind about project spend. For real estate developers and lenders, fixed billing requires substantially less paperwork. However, if the project is subject to delays or extra costs, the project owner may find themselves paying out of pocket.

Pros of fixed billing:

• Clients appreciate knowing the exact cost upfront
• Potential for higher profits if work is completed efficiently
• Simpler billing process and paperwork
• Easier for clients to budget and secure financing
• No need to track and justify hours

Risks of fixed billing:

• Risk of losses if project scope expands
• Unforeseen challenges can eat into profits
• May need to be more conservative with estimates
• Less flexibility for project changes
• Requires excellent project planning skills

What is Time and Material Billing?

Another project cost method is time and material billing. With time billing, project owners charge an hourly or daily rate plus the cost of materials used. This method is often used with complex projects where unexpected challenges are likely to occur. It creates less financial risk for project owners and investors, but clients typically don’t prefer this method. The open-ended approach can make it hard to estimate how much the client will pay for the project.

Real estate developers should note that the time and material billing system often creates pressure to perform work more quickly. When clients are paying by the hour, they may become more demanding about the speed of project completion.

Pros of time and material billing:

• Guaranteed profit margin on all work performed
• Flexibility to handle unexpected issues
• Easier to accommodate project changes
• More transparent for complex projects
• Less financial risk when scope is uncertain

Risks of time and material billing:

• Clients may worry about open-ended costs
• More detailed record-keeping required
• Can create tension over work pace
• May need to justify time spent
• Harder for clients to budget

Like most aspects of real estate development, billing methods are complicated and accompanied by nuance. Understanding which method is best for a particular project requires research and experience. To continue expanding your knowledge about construction finance, download our construction payments report for more insights.