Construction Management Engineering

Cost Plus Contracts In Construction [PDF]

What’s Cost Plus Contract?

In a construction cost-plus contract, the owner agrees to cover the actual expenses of the project. These costs include materials and labor, plus other costs incurred to complete all works. The “plus” part refers to a fixed fee or percentage agreed upon in advance that covers the contractor’s overhead & profit. Typically, cost-plus contracts are “open book,” meaning the owner has the right to see actual expenses. Some cost-plus contracts in construction include a guaranteed maximum price. This type of contract is different from Lump Sum Contract.

Main components of a cost-plus-contract:

1-Direct costs:

materials, Labor, supplies, equipment, and professional consultant being used by the main contractor

2-Overhead costs/ indirect costs:

All related  expenses that are needed to perform the contract; typically a percentage of labor costs and can include office rent, insurance, office supply, communication expenses, mileage, and printing or reproduction of construction drawings

3-Fee or profit:

Typically a fixed percentage based on the labor costs directly associated with the work

When to Use a Cost-Plus Contract

A cost-plus contract may be used when the budget is being restricted or when there is a high probability that the actual cost of works might be reduced. A cost-plus contract is preferred when there is not enough data to perform a detailed estimate of the work or when the design is not completed. Governmental agencies prefer cost-plus contract because they can select the contractor based on their qualification instead of the low bidder. Cost-plus is widely used to perform research & development works because the risk can be controlled by the contracting officer.

Pros and Cons of Cost-Plus Contracts

Advantages Of A Cost-Plus Contract :

  • The contractor will not be able to reduce workmanship.
  • It can focus on the quality of works instead of cost.
  • It could cover all related expenses.
  • The contractor’s risk is minimized

Disadvantages Of A Cost-Plus Contract :

  • Present uncertainty to the project owners because the final cost cannot always be determined at the beginning
  • Require additional resources & management to reproduce and justify all related costs
  • May lead to disputes when trying to recover construction-related expenses
  • May lead to projects running longer than expected

Types of Cost-Plus Contracts

Cost-plus contracts can include variations or features to serve the needs or special circumstances of specific construction projects.

1.Cost-Plus incentive fee:

Incentive fees are based on the contractor’s performance & are set under the contract provisions. The type and amount of the incentive may be based on the project goals or schedule deadlines.

2.Cost-plus award fee:

A cost-plus award fee provides for award fees, predetermined &  set forth in contract documents. The fee can be a gratitude or penalty fee.

3.Cost-plus fixed rate:

A fixed rate contract sets predetermined labor rates based on the contractor’s history and labor costs. It is a contract used by contractors who really know their actual costs, but it provides little flexibility for contingencies.

4.Cost-plus fixed fee:

A cost-plus contract that covers direct & indirect costs plus a pre-determined fixed fee.

See Also
Type Of Construction Contract
Fidic Letter By Contractor

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