Cost Plus or Fixed Fee Contracts

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Commonly Asked Questions about Cost Plus or Fixed Fee Contracts

What is a good reason for a buyer to use a cost-plus-fixed-fee contract?

Cost-plus fixed-fee contracts further incentivize contractors to complete jobs by ensuring the buyers or customers cover the projects actual costs for materials, labor, and overhead. The fixed fee is a specific amount agreed upon by both the customer and the contractor.

What are the disadvantages of a cost plus fee contract?

Disadvantages of Cost Plus Contracts Limited cost control for the client. Potential for contractor inefficiency due to guaranteed payment. Increases the risk of disputes over incurred costs.

What is a defined cost plus fee?

A cost reimbursable contract (sometimes called a cost plus contract) is one in which the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee. Their actual costs are calculated based on their accounts and records, rather than a pre-determined rate or price.

What is a cost plus a fee contract?

A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract.

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 a disadvantage of a cost-plus-fixed-fee contract?

Disadvantages for the Client. Contractors have an incentive to work faster, in order to maximize the profit benefit (time is money) with a CPFF. The sooner they finish the job, the more they make per hour of work. This can lead to quality issues for the client.

What are the rules for cost plus?

If you use a cost plus contract, you must give a fair and reasonable estimate of the total amount of money you are likely to receive under the contract at the time the contract is signed. You should be careful that the estimate is not a representation of the final contract price.

What is the difference between cost plus and cost-plus-fixed-fee contract?

Two common types of contracts are fixed-price, for which the projects total cost is predetermined, and cost-plus, for which expenses are estimated but the final price is determined at the projects end. Profit is also handled differently, with varying levels of risk.