ResidentialBusiness Posted January 28 Report Posted January 28 Contracts specify the terms of the agreement between an employer and a contractor for the execution of a construction project. Because these agreements are so diverse, there are many different types of construction contracts, each with its own benefits. One of these is called a cost-plus contract. What Is a Cost-Plus Contract? A cost-plus contract is a construction agreement between an owner and a contractor, in which the project owner reimburses the contractor for all incurred costs and pays an additional fee, which corresponds to the profit the contractor makes for executing the project. This means the owner is not agreeing to a set budget for things like materials and labor, but rather, agreeing to pay whatever it takes to get the job done. Additionally, the contractor is guaranteed a set profit in the form of a flat fee or a percentage. To execute a cost-plus contract project successfully you’ll need a robust project management software like ProjectManager. With ProjectManager you can create project schedules, allocate resources, track costs and monitor progress in real time. Using its project management features you can keep projects and track and ensure they’re delivered on time and on budget. Get started for free today. /wp-content/uploads/2023/04/event-plan-gantt-chart-light-mode-CTA-1600x787.jpgExecute your cost-plus contracts with powerful construction scheduling software. Learn more! At first, this can sound like a precarious contract administration situation for both parties. Employers are trusting contractors to use good judgment and contractors are trusting employers to reimburse them. Despite this, there are many situations in which a cost-plus contract is the best fit. Construction projects, for one, largely use them because owners are hiring experts to build something outside of their capabilities. When to Use a Cost-Plus Contract There are various types of construction contracts, such as fixed-price contracts, cost-reimbursement contracts and time and materials contracts, among others. Each of these types of contracts has benefits and disadvantages depending on the particular characteristics of a construction project, so it’s important to understand when it’s best to use a cost-plus contract. Here are some of the scenarios in which a cost-plus contract is ideal for both the project owner and general contractor: Cost-plus contracts are the best choice when quality is more important for the project owner than time spent or costs. Ideal for complex projects where the project scope is uncertain or likely to change over time. Best for owners that wish to track project costs such as labor, materials, equipment or any other resources. This detailed cost-tracking information can be used for later projects. Perfect for high-risk projects where contractors don’t want to risk their profitability with a fixed-price contract. What Should Be Included in a Cost-Plus Contract? A cost-plus outlines how both direct and indirect costs will be covered and how they will be reimbursed to the contractor. But these costs only make up a portion of the agreement. This type of contract also includes an additional, predetermined amount to be paid to the contractor on top of expenses. This additional amount can be a flat fee, a fixed rate (determined by the cost of labor, supplies, etc.) or a combination of the two. For example, a contractor may stipulate that the employer pays them a percentage of labor costs, on top of being compensated for the cost of labor itself. Parties Involved Identifies the client and contractor, establishing their roles in the construction project. Clear identification helps define responsibilities and ensures accountability. It also establishes the foundation for communication, compliance and legal enforcement throughout the agreement. Project Description Summarizes the construction project, detailing objectives, location and general scope. This overview aligns expectations between the parties and provides context for cost tracking and performance evaluation. As a result, all parties understand the project’s intent. Scope of Work Outlines specific construction tasks, deliverables and exclusions. It prevents misunderstandings by defining what is included in the project and what is not. In return, the scope of work allows for accurate cost allocation and helps the contractor and client stay on the same page. Cost Reimbursement Terms Details how construction costs are categorized and reimbursed, such as direct costs for materials and labor, indirect costs for overhead and contractor fees. Transparency in cost reimbursement ensures mutual trust and avoids disputes. Payment Terms Specifies how and when payments will be made for construction costs, including invoice submission, approval processes and payment schedules. It maintains cash flow for the contractor and ensures the client stays informed about expenditures. Cost Limits Establishes a maximum budget or not-to-exceed clause to control project spending. It provides flexibility while safeguarding the client from unanticipated expenses, requiring approval for significant cost changes. Documentation Requirements Lists records contractors must provide, such as receipts, invoices, and time logs. These documents ensure costs are legitimate and align with the contract, providing transparency and accountability in project finances. Change Order Process Defines how scope changes or unforeseen construction adjustments are managed. This ensures costs and timelines are updated formally which helps prevent delays or disputes over unauthorized changes. Termination Clause Sets the terms for ending the contract, including reasons like non-performance or unforeseen project issues. When there are clear termination terms, it protects both parties by minimizing financial and legal risks. Dispute Resolution These include methods like arbitration or mediation for resolving conflicts. Addressing potential disputes constructively minimizes delays and costly legal battles to ensure the project is completed smoothly. Insurance and Liability Specifies required insurance coverage and liability allocation to protect both client and contractor. Proper insurance mitigates risks related to accidents, damages or unforeseen events during construction. Governing Law Identifies the legal jurisdiction for resolving disputes and interpreting the contract. Establishing governing law ensures clarity in enforcement and adherence to local regulations throughout the construction project. Cost-plus contracts are most successful when they’re specific, and there’s no such thing as too much detail. The most well-written contracts also outline things like how expenses should be documented by contractors and how any disagreements between the contractor and employer should be handled. These details — even if they’re ultimately not needed — can save the project. /wp-content/uploads/2021/05/cost-plus-contract-example.png Get your free Cost Plus Contract Example Use this free Cost Plus Contract Example for Word to manage your projects better. Download Word File Cost-Plus Contract Example To better illustrate what a cost-plus contract should look like, here’s a cost-plus contract example you can download for free. It contains the elements that we’ve outlined above. Imagine a scenario where an individual needs to hire a contractor to build a custom single-family home. In this case, the general contractor can execute all of the scope of work without needing to hire any subcontractors. /wp-content/uploads/2021/05/cost-plus-contract-example.png Types of Cost-Plus Contracts A cost-plus contract covers the costs of materials, labor, equipment, etc. plus a base fee or a percentage of overall costs. But how are these additional fees and rates determined? Here are four of the most common methods: Cost-Plus Incentive Fee A cost-plus incentive fee variation includes an incentive fee awarded to the contractor for a job well done. The specific terms of this incentive should be clearly stated in the contract. Cost-Plus Award Fee A cost-plus award fee variation includes built-in fees specifically stated in the contract. Unlike a cost-plus incentive fee contract, these fees are awarded for meeting specific criteria or deadlines. These fees can also be charged to contractors or deducted from their earnings. Cost-Plus Fixed Rate Cost-plus contracts cover both direct and indirect costs. One of these direct costs is labor. A cost-plus fixed-rate fee sets a fixed rate for the labor. This variation is often seen when contractors are hired for a very specialized task and can accurately estimate labor costs. Cost-Plus Fixed Fee A cost-plus fixed-fee variation also accounts for direct and indirect costs, but it also includes a flat fee that is determined before the contract is finalized. Advantages of a Cost-Plus Contract Cost-plus contracts are a favorite among contractors, but they’re just as beneficial to employers, as well. The old saying is true: no risk, no reward. And the rewards of using one can be great. They shift the focus from quantity to quality: Because contractors are not confined to a set budget with a cost-plus contract, they’re much less likely to cut corners in order to get the work done. Contractors know their expenses will be covered and are far more likely to choose the best materials and people for the job. They mean expenses go down with prices: While a cost-plus contract might seem like a big risk (employers agreeing to cover all expenses) this agreement ensures that employers will be charged fairly. If the price of a certain material goes down, they will pay the new lower amount. Pricing changes all the time, and this way there’s no risk of paying more than something is worth. They are more flexible than other types of contracts: Because cost-plus contracts mean employers are committing to paying contractors for direct and indirect expenses, contractors have more freedom to hire experts, choose the best materials and take enough time to get the work done right. This is especially important in construction projects, where cutting corners can harm the longevity of the finished product. Disadvantages of a Cost-Plus Contract For as many advantages as there are to using a cost-plus contract, there are a few disadvantages. When we’re aware of these “danger zones” they’re easier to avoid. They require a high level of trust: Cost-plus contracts require a large degree of trust from both the employer and the contractor. Employers are trusting contractors to make smart spending decisions and choose fairly priced options. On the other side of the coin, contractors are trusting employers to reimburse them for these expenses. Cost-plus contracts are a popular option when employers and contractors have a positive history together and/or the contractor has worked successfully with other employers under this type of contract. They make budget estimates difficult: Cost-plus contracts are best suited for projects with flexible budgets. As you can imagine, the cost of supplies and materials is constantly fluctuating. This means contractors might have to pay more for something than they initially anticipated in order to do the job well. This isn’t to say projects cannot have any type of budget, but there should be some “wiggle room”. They require thorough documentation: Without the proper documentation of costs and expenses, it’s impossible for employers to reimburse contractors accurately. This can create distrust and conflicts down the road, not to mention confusion. If records are kept and organized correctly, this isn’t a problem, but it is a common pitfall to be aware of. How ProjectManager Helps With Cost-Plus Contracts ProjectManager is award-winning software that allows you to keep all your important project documents in one location with unlimited file storage. This includes your cost-plus contract. Odds are, you’ll want to refer back to this document at some point, and you need to know exactly where to find it. /wp-content/uploads/2022/03/Files-Page_Wide_Zoom-175.jpg With ProjectManager, core documents like these live in the same place as your Gantt chart, along with other powerful features used to manage projects. This means no more jumping back and forth between pdfs. and your project management software. /wp-content/uploads/2022/03/Gantt_Manufacturing_Wide_Zoom-150_Task-Info.jpg If you need to point out certain details of the contract to team members, simply tag them in a comment and keep the conversation going. No more emailing documents back and forth and retracing your steps through messy email chains. Now, your discussions about documents like contracts are attached to the documents themselves. /wp-content/uploads/2022/03/Gantt_Wide_Zoom-175_Comments-and-Collaboration.jpg ProjectManager is a cloud-based project management software that organizes tasks, teams and projects for greater productivity. Plan, monitor and report on your construction project while giving your crew the collaborative tools they need to work better together whether on the job or off-site. Join the tens of thousands of teams already using our software to boost efficiencies and take this free 30-day trial today. The post Cost-Plus Contract In Construction: A Quick Guide appeared first on ProjectManager. View the full article Quote
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.