Cost-plus contracts are often used when the scope of work has not been clearly defined, such as when the project design is still being finalized and the owner wants to begin construction.
Generally, with a cost-plus contract, an owner agrees to pay the cost of the work, including all trade subcontractor work, labor, materials, and equipment, plus an amount for contractor’s overhead and profit.
Since the contractor is reimbursed only for actual costs, plus a fee for overhead and profit, if actual costs are lower than estimated, the owner gets to keep the savings. If the actual costs are higher than estimated, the owner must pay an additional amount, unless the cost is capped at a guaranteed maximum price.
The advantage of a cost-plus contract is that the project will result in what was intended, even if costs run high. However, despite the lower amount of risk for the contractor, these contracts are harder to track, and more supervision is needed.
The most common cost-plus contracts are:
- Cost Plus Fixed Percentage – Contractor compensation for overhead and profit is based on a percentage of the actual cost.
- Cost Plus Fixed Fee – Contractor compensation is based on a fixed sum independent of the final project cost. The customer agrees to reimburse the contractor’s actual costs, regardless of amount, and in addition pay a negotiated fee independent of the amount of the actual costs.
- Cost Plus Fixed Fee with Guaranteed Maximum Price Contract – Compensation is based on a fixed sum of money. The total project cost to the owner will not exceed an agreed upper limit.
No matter the type of contract involved, it is imperative that each party to the contract completely and fully understand the terms and provisions of the contract. This may sound like common sense, but many times a party does not fully understand the impact and effect of the contract they are signing.
Contracts are not one size fit all. There are many different types of construction contracts, which can be tailored to minimize and protect a party’s interests.