There are three methods of compensating contractors for work performed, viz. -

(a) A fixed price for the work. Under this method the owner knows the cost at the time he enters into the contract. The contractor estimates that the price will enable him to perform the work and obtain a profit on the contract.

(b) Actual cost plus a percentage. Under this method the owner pays for the job only its actual cost in labor and material, but pays the contractor a percentage, usually 10%, on the cost as compensation for his services. The owner limits the profit of the contractor to the amount of the percentage. There is no reason for the contractor to perform inferior work as the owner pays its cost, but on the other hand there is no inducement to economy as the larger the cost the larger the contractor's profit. A reliable contractor will, however, in fairness to his employer, and to add to his own reputation, aim to keep the cost down.

(c) Cost plus a percentage, with the total limited. Under this plan the owner pays cost plus a percentage as under the last described plan, but there is an added feature in that the contractor agrees that in no event shall the total cost of the work exceed a specified sum. This method places a guaranteed limit upon the cost.

There are several methods of making payments to contractors during the progress of the work. One is that of paying a proportion of the value of the work completed at stated periods, as, for example, it may be agreed that the contractor shall receive 85% of the value of the work completed each month, final payment being due thirty days after completion of the contract. Another method is to have definite amounts or percentages payable upon the work reaching certain stages. An example of this would be an agreement under which the owner of a building under construction pays a certain amount when the framing is up, a second payment when the building is enclosed, a third when brown plaster is on, etc.

It is not usual that payments to contractors before completion are for the full value of the work accomplished. The amounts held back are known as retained percentages.