There are three different plans of letting contracts, all of which the contractor should be thoroughly familiar with. The difference between the three methods lies in the manner of compensating the contractor for his knowledge, experience and effort. The simplest and best known form of contract is the lump-sum contract. According to this method the contractor estimates the cost to himself for performing a certain piece of work, adds his operating expenses and profit, and then, if awarded the contract, does it for that price, make or lose. If the contractor is an accurate estimator, a close buyer, skilled designer and good handler of men, he can sometimes make on his work a small percentage more than he had figured. If, on the other hand, he is inaccurate in figures, a poor buyer, unskilled designer and has no control over his men, the chances are that he will either lose on the work or will have to slight some of the detail in order to pull through without loss. At its best this form of contract puts one party against the other. The contractor's interests seem to lie in doing the least work and supplying the poorest materials which will prove acceptable, while the owner's interests prompt him to seek the best and most that he can claim under the terms of the contract. The result is there is seldom harmony and good feeling when extremes meet. With most of the responsible contractors, however, everything is supplied that their contract calls for and there is no friction between contractor and owner. Still, for the sake of contrasting the different methods of letting contracts, it may be said that in the lump-sum contract the interest of the contracting parties are opposed.

The next in order is the percentage plan of letting contracts. According to this method the contractor furnishes all material and labor without any other agreement than that he will furnish them at a certain percentage above their cost to him. This method is a highly satisfactory way of doing business if the contractor is honest, but if not overscrupulous in his dealings the door is open to many ways of mulcting the owner. More men can be put on the work than can be economically used; inferior or slow workmen can be put on such contracts, while the good workmen are reserved for lump-sum contract work; a full and fair day's work might not be required of the men; more material might be used than is economically required; more expensive goods ordered than the operation warrants, and last, but not least, the dishonest contractor is tempted to pay more for his goods than their regular market value. In fact, the more the operation costs the more there is in it for the contractor, and a dishonest contractor might run the cost far above what rightly it should be. In the percentage form of contract, then, it may be said that the interests of the contracting parties are not the same, and that the interest of the contractor is to run the cost far above what good design and installation require and far above what the owner wishes.

The final and best plan of letting contracts is by the cost-plus-a-fixed-sum method. By this plan the cost of an operation is estimated the same as for a lump-sum contract, and the profit for the work determined in the same manner. Having determined the profit for that operation, that forms the basis of remuneration for the contractor, who gets no more or no less, regardless of what the work costs to install. According to this method it will be seen there is no incentive to make the work cost more, but, on the contrary, all the incentive in the world for keeping the cost below that estimated. If it were above the estimated price it means nothing in the pocket of the contractor, but it does mean a dissatisfied owner and, perhaps, a loss of future business to the contractor. To illustrate this method: assume that by estimating an operation it was found that it would cost, net, $6,000. Assume further that the contractor's operating expenses are 7 per cent. and that he figures a profit of 8 per cent. Then the compensation to the contractor would be 8 per cent. plus the 7 per cent operating expenses on the estimated cost of the operation. Seven per cent. of $6,000 equals $420 and 8 per cent. of $6,420 equals $933.60, which is what would be paid the contractor for his skill in design, services in assembling and purchasing material, and the handling of men. According to this plan of letting contracts the interest of both parties to the contract are identical. They both want the very best installation which can be put in for the cost allowed. If the work is not all that it should be the defects will reflect on the contractor, while if the work gives satisfaction it will redound to his credit.

Another feature of such a method of letting contracts lies in the fact that the owner at any time can alter his plans without trouble or without increasing the cost above that necessary for the material and labor.