Costs Plus Construction Contract Explained

A “Costs Plus Construction Contract,” also known as a cost-reimbursement contract, is a type of construction agreement where the client agrees to reimburse the contractor for the actual costs incurred during construction, plus an additional fee or percentage to cover overhead and profit. Here’s how it works:

1. Cost Reimbursement: Under a costs plus construction contract, the contractor is reimbursed for all legitimate, allowable, and verifiable costs incurred in the construction process. These costs typically include materials, labor, equipment, subcontractor fees, permits, and other expenses directly related to the project.
2. Fee Structure: In addition to reimbursing the contractor for actual costs, the contract typically includes provisions for the contractor to receive a fee or markup on top of the costs. This fee may be structured as a fixed amount, a percentage of total costs, or a combination of both.
3. Transparency and Documentation: Both parties must maintain detailed records of all project-related expenses to ensure transparency and accountability. Contractors are typically required to provide regular reports, invoices, and receipts documenting the costs incurred. Clients may also have the right to audit the contractor’s records to verify the accuracy of expenses.
4. Flexibility: Costs plus contracts offer flexibility to accommodate changes and unforeseen circumstances during construction. Since the contractor is reimbursed for actual costs, adjustments can be made to the project scope, specifications, or design without the need for extensive change orders or renegotiation of the contract.
5. Risk Sharing: Costs plus contracts often involve a sharing of risk between the client and the contractor. While the client bears the risk of fluctuating material prices, scope changes, and project delays, the contractor assumes the risk of cost overruns and inefficiencies in construction.
6. Control and Oversight: Clients may retain greater control and oversight over the construction process under a costs plus contract compared to fixed-price contracts. Since they are reimbursing the contractor for actual costs, clients may have more involvement in decision-making, material selections, and project management.
7. Dispute Resolution: Disputes may arise concerning the reasonableness of costs, the quality of workmanship, or the interpretation of contract terms. Clear dispute resolution mechanisms should be outlined in the contract, such as mediation, arbitration, or litigation, to address conflicts efficiently and minimize project disruptions.
8. Completion Incentives: To incentivize timely completion and cost-effective performance, contracts may include provisions for bonuses or incentives tied to project milestones, budget adherence, or quality standards.

Overall, costs plus construction contracts offer a flexible and transparent approach to project delivery, allowing clients and contractors to collaborate closely while managing costs and risks effectively. However, they require careful documentation, communication, and oversight to ensure fair and equitable outcomes for all parties involved.