A cost-plus fixed fee construction contract, also known as a cost reimbursement contract, provides both parties a full level of transparency and comfort. This contract allows the general contractor to be paid, in full, all of their allowed expenses outlined in their contract, as well as an additional payment for their own profit.
General contractors, like any other vendors, typically incur a number of out-of-pocket expenses throughout the duration of a project. These out of pocket fees might include travel expenses, additional materials needed, new equipment, etc. A cost-plus fixed fee contract allows the general contractor to expense the necessary means required to complete the project to the fullest extent, all the while knowing they will be properly reimbursed. Cost-plus fixed fee contracts should provide, in detail, what should be properly reimbursed and what should not. There are three main components of a cost-plus fixed fee contract:
Direct Costs: Direct costs are the basic cost incurred by the general contractor. These items include, but are not limited to supplies, labor, equipment, etc.
Overhead Costs: Overhead costs, also known as indirect costs, are the business-related expenses deemed necessary to fulfill the contract at hand. These costs are typically laid out as a percentage of overall construction costs, and can include items such as printing out drawings, site visits, job trailers, and project management.
Profit: Like any other business, the general contractor needs to be turning in a profit for the work they are performing. Typically, the profit is a fixed fee percentage based on the total labor costs of the project.
A cost-plus fixed fee contract is both common and necessary in the commercial real estate sector. Whether you’re relocating your office space or building a new facility out of the ground, this contract can provide a solid backbone to your project, allowing you to clearly outline what shall be reimbursed and what is not.