If you have read any of our other posts on construction contracts, you know by now that purchasing construction is a critical component to a project’s success. You have to purchase construction in the right way for your project, for your business goals and for your company or institution’s culture. In today’s post, we will discuss the cost-plus construction contract.
What is it?
A cost-plus contract refers to a contract in which the contractor gets paid for all construction related expenses as previously agreed. Both parties, the owner and the contractor, agree to services provided at a cost, plus a multiplier. Some cost-plus contracts can be drafted to set a limit that will be used to restrict the not to exceed amount in the contract. The term “plus” refers to the profit allowed to be earned by the contractor. The cost-plus contract provides a benefit to the contractor because all risks are basically covered and all expenses are likely to be paid.
Related- The Unit Price Construction Contract
When Should this be Used?
The cost-plus model is used on jobs with a lot of unknowns and hidden conditions. It also often used for smaller jobs, but can work for larger jobs as well. Whenever the plans and specs are not completely clear, cost-plus may be the only way to proceed.
Who benefits from this Method?
The owner can benefit, theoretically, because the contractor does not have to add large contingencies into the fixed bid to cover the unknowns. The contractor will not be able to reduce workmanship, therefore allowing the contractor to focus on the quality of the work, instead of the cost. The contractor’s risk is also minimized, however, cost-plus jobs are often difficult to estimate. The contractor also has to consider how the project will be staffed, since payment is based on the set-fee in the contract, rather than on actual labor hours.