Why a lump sum contract approach is better then a cost plus when contracting a designer?

Question

A design company is being contracted to design and specify the equipment list for a plant. Why is it better to use a lump sum contract over a cost plus with the designers...
I need reasons rather then experiance and advice - for coursework

Additional Details

Let me clarify the question:
A revolutionary plant (first time ever built) requires a contractor to design the plant and produce an equipment/parts list.
What type of contract (cost plus or lump sum) is suitable for the contracter and the contractor

Answer 1

Best Answer - Chosen by Voters

1) It has to do with incentives. When you hire someone cost plus there is an hourly rate. How many hours is it going to take? What is the workers incentive? They want as many friggen hours as possible if the workers on your project are slow otherwise you are now the gravy train.

If they are trustworthy people and you know they won't do this then you want to use this method. The reason is that even good intentioned people will have to add in a padding for lump sum to be sure any unforseen obstacles don't screw them up.

2) Another point is that a designer will sometimes be the type of person that might be considered a perfectionist. So they will take it upon themselves to make darn sure you have the best darn whatever that has ever been designed. This is a burden the company has to handle if it is lump sum, while it will be your problem if you go with cost plus.

For this reason you will be more involved with a cost plus to "manage" them, when the reason you hired them is because you don't do this sort of thing yourself. Not really something you should be managing.

Answer 2

I think a cost plus fixed fee is the best way to contract for a plant design. This way you pay the actual costs and the contractor doesn't make more money if he drags out the work. His profit is fixed from the beginning. The cost plus aspect permits the client to have more input and flexibility in working with the designer.

Fixed cost contracts only work well if you have a VERY DETAILED DESCRIPTION OF WHAT YOU WANT THE CONTRACTOR TO DO and permit him to execute with little or no input from the client. Fixed cost contracts can also be a crutch for the inexperienced client who can try to wring out the very last bit of work from the contractor under the argument that "it is in the contract."

Which contract type you choose is only as good as the experience and ability of the client and the contractor and their desire to work together. To put it slightly differently, a contract is only as good as both parties willingness to live up to its requirements.