Draft a Cost-Plus Construction Contract

Standardized Legal Documents Draft a Cost-Plus Construction Contract

Stay on the Plus Side—Write a Solid Cost-Plus Construction Contract

Whether you’re the contractor or the owner, a cost-plus construction contract could be beneficial for you if you write it adequately. This article will walk you through the cost-plus contract, weigh its pros and cons, and provide some tips.

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What Is a Cost-Plus Construction Contract?

A cost-plus or a cost-reimbursement contract is a type of construction contract. It’s common in civil, residential, and commercial sectors. Under this contract, the contractor gets paid for all expenses on a project and receives an additional profit.

Types of Costs in a Cost-Plus Contract

A cost-plus contract includes different types of costs, and the most common are:

  1. Direct costs—money spent to complete the construction work (e.g., material, labor, and equipment)
  2. Indirect or overhead costs—business-operation expenses (e.g., insurance, transportation, and office space rental)
  3. Profit—agreed percentage of the contractor’s direct costs

Instead of the percentage profit, some cost-plus contracts may consist of a fixed or variable fee. A fixed fee is also supposed to cover any indirect costs.In the case of a variable fee, both the owner and the contractor share any cost savings.

A contractor won’t be reimbursed for every expense they incur on a project. They need to justify the expenses and agree on them with the owner. Indirect costs can be especially tricky, and the owner may refuse to cover them.

Cost-Plus Construction Contract Use

Cost-plus contracts are usually used when it’s too difficult to estimate the cost of the project to determine a fixed price. If the project is budget-friendly and there’s plenty of wiggle room, a cost-plus contract may be a good idea.

Another situation where these contracts are common is when the owner and the contractor know each other, and the owner trusts the contractor to make a detailed record of the costs to be reimbursed.

Cost-Plus Contracts—Benefits and Drawbacks

While a contractor may like the sound of an added profit, there are some drawbacks to the cost-plus construction contract for both parties. Check out the pros and cons in the table below:

  • Budget-friendly—not worrying about comparing different prices to fit a certain budget because the costs will be reimbursed by the owner
  • No need to estimate project costs right off the bat
  • Option to have a cap if both parties agree
  • Thorough records necessary—it can be a drawback for the contractor if they’re not used to keeping a spending record
  • Indirect costs—a nuisance for owners, and they can also be an issue for the contractors in case the owner doesn’t agree to cover all of them
  • Cashflow—contractors need to cover the costs and get reimbursed later. This can be problematic until the contractors get paid
  • The final cost is uncertain

Tips for Making the Most of Your Cost-Plus Contract

Before you write or download a template of a cost-plus contract, it’s important to negotiate the critical terms of your contract, especially the ones that might lead to a dispute. 

It’s also vital to agree on a clear list of reimbursable items. As an owner, you don’t want to be taken advantage of, and as a contractor, you wouldn’t want to waste your money on items and not get paid.

With an open-book approach and a detailed list of used materials, both parties will be satisfied.

What Other Types of Construction Contracts Are There?

If you decide not to use a cost-plus contract, you may opt for other construction agreements, such as the following:

  1. Lump-sum contracts—this is a fixed price contract as the cost is determined for the entire construction job beforehand
  2. Unit price or measurement contracts—the contractor needs to provide a price estimate for every unit of work
  3. Time and materials contracts—the owner reimburses the contractor for the materials, and an hourly or daily rate is established
  4. Guaranteed maximum price contracts—a cap on total price is determined, and in case there are any additional costs, the contractor needs to cover them

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