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.
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:
- Direct costs—money spent to complete the construction work (e.g., material, labor, and equipment)
- Indirect or overhead costs—business-operation expenses (e.g., insurance, transportation, and office space rental)
- 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:
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:
- Lump-sum contracts—this is a fixed price contract as the cost is determined for the entire construction job beforehand
- Unit price or measurement contracts—the contractor needs to provide a price estimate for every unit of work
- Time and materials contracts—the owner reimburses the contractor for the materials, and an hourly or daily rate is established
- 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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