Cost Plus Construction Contract

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Commonly Asked Questions about Cost Plus Construction Contract

What is a cost-plus contract in construction?

A cost-plus contract is a construction agreement that requires reimbursement for project costs as well as a markup that covers the contractors overhead and profit. In other words, the name is a short-hand way of remembering what the contract covers: project costs plus contractor markup.

What are the disadvantages of a cost-plus contract?

Cons of cost plus a percentage of cost in a contract This type of contract doesnt address the final cost, which can shift the risk onto the client. It may be harder to adhere to a budget because the final cost is unknown when they sign the contract.

What is an example of a construction cost-plus?

Examples of Cost-Plus Contracts A project is expected to cost $50,000 in materials and labor. The contract states that the customer pays a 10% fee on the final project cost. If the actual cost of the project is $56,250, then the project fee would be $5,625.

What are the risks of cost-plus?

Cost-plus contracts can lead to surging project costs beyond initial budgets since there are no constraints around a fixed price cap. Owners take on heavy financial risk and must closely scrutinise all contractor pay applications.

How do you protect yourself in a cost plus contract?

Here are six practice tips that can help an owner protect themselves from the risk posed by a Cost-Plus contract: 1) Demand Quantity Guarantees. 2) Limit Increases in the Contractors Fee. 3) Eliminate Budgetary Fluff. 4) Carefully Select the Project Team. 5) Demand Transparency. 6) Reduced Risk means a Reduced Fee.

What is the main disadvantage of cost-plus pricing?

One drawback of cost-plus pricing is potential profit loss. If you switch suppliers or get cheaper materials, your costs will get lower. Strictly cost-plus pricing would require you to lower your selling price. If consumers are willing to pay more for the product, youd be missing out on revenue.