Imagine actually getting paid for the expenses you incur during a construction project… and then some.
In a nutshell, that’s a cost-plus contract.
A cost-plus contract definitely has its perks, but they aren’t a good fit for every contractor, or every project.
In this guide, we’ll...
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The construction industry can be a complicated and, let's admit, sometimes frustrating line of work. From payment delays to convoluted contract language, it can be hard to know how best to manage everything.
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Wondering if a cost-plus contract is the right move for you? Read on.
There are several types of cost-plus contracts. Generally, you’ll see them defined this way:
A cost-plus contract (also known as a cost-reimbursement contract) describes a contract where the contractor gets compensated for all expenses related to the project in addition to an agreed-upon sum at the end of the project.
The ‘agreed-upon sum’ for profit is the ‘plus’ in a cost-plus contract.
A cost-plus contract includes payment for all expenses incurred during a construction project plus a pre-specified amount that the contractor is paid at the end of the project.
The costs in a cost-plus contract include:
Direct costs include any expenses incurred for the specific task at hand. You may
see these called “cost of goods sold” or COGS. Materials used and direct labor is included in direct costs.
Indirect costs or ‘overhead costs’ refer to the expenses related to getting the task done. For example, mileage used to get to a job site can be recorded and reported as an indirect cost.
Profit is the cost or fee that the contractor charges for the work. Typically, this amount is a percentage of the overall cost of the project or of direct costs.
In a cost-plus contract, it’s the responsibility of the contractor to keep a record of all costs incurred on a project so that he or she is accurately compensated for the work they do.
There are multiple types of cost-plus contracts.
A cost-plus-fee contract is a cost-plus contract that includes some type of added fee.
The primary types of cost-plus construction contracts are listed and described below:
Typically, this happens in a situation where a contractor is being awarded for good performance.
There are several reasons why it might be beneficial to use a cost-plus contract for your next job.
After all, they are one of the most widely used agreements in construction — largely because they benefit both the contractor and the owner in most situations.
That said, a cost-plus contract may not be right for all projects or contractors.
Read on as we discuss cost plus construction contract advantages and disadvantages in more detail.
Contractors and owners alike can benefit from a cost-plus contract.
For the contractor, some of the top advantages of a cost-plus contract stem from the fact that they:
A cost-plus contract basically shifts most of the risk associated with a given project to the owner. If there are unexpected changes in costs or efficiency, it’s covered under this contract.
In other words, a contractor doesn’t need to worry about the costs coming out of their profit margin which can be a huge relief for many contractors.
Sometimes, however, there is a cap on expenses worked into the contract so that not every cost would be reimbursed. This typically applies to situations where the contractor makes an error or is found to be negligent.
Cost-plus contracts usually allow contractors the ability to prioritize choosing high-quality materials over budget constraints. This shift to a focus on quality can be a benefit for both parties.
A cost-plus contract is something that can be used if a project is especially time-sensitive. In other words, a cost-plus contract provides flexibility so that projects can begin more quickly.
For example:
If a property owner is anxious to get a project going as soon as possible, he or she may opt for a cost-plus contract so that their contractor can get started right away instead of waiting for an estimate to be finalized or approved.
In this type of agreement, of course, an owner would expect a contractor to make good on his or her promises.
While there are many advantages to a cost-plus construction contract, there are disadvantages that you will want to be mindful of as well.
Cost-plus contracts typically pose more risks for the owner. However, issues can arise for contractors too.
Some of the top disadvantages of a cost-plus contract include:
Since terms are not decided from the get-go as in a fixed contract, navigating the unknowns can get tricky.
Unexpected shortages or delays can cause issues in the overall cost or delivery of the project which may affect profit.
In the same vein, complications with cash flow can make it difficult for contractors to front the cash needed to start a project — and we all know that cash flow isn’t always something to rely on in the construction business.
This is an issue because most cost-plus contracts involve the contractor getting reimbursed for the costs he or she incurred on a project.
That said…
The most important factor in getting reimbursed is to properly keep track of expenses throughout a project.
If you’re someone who tends to misplace receipts or is generally unorganized, this could cause some problems.
Fortunately, there is a quick and easy way to keep track of your projects and invoices thanks to Flexbase.
In fact, Flexbase has an automated invoice template ready for you to use — and it’s free.
When it comes to contracts where profit is added to the cost of the project, a cost-plus contract is the way to go.
As we mentioned in a previous section, there are a few options you can choose from.
To reiterate, the main types of cost-plus agreements are:
Fixed-price contracts would be the other most commonly used type of contract in construction.
Cost-plus contracts can be complicated and hard to understand at times.
That’s why we’ve compiled a list of questions contractors usually have about them.
Read on to learn the answers to a few common cost-plus contract FAQs.
A cost-plus contract is generally used if:
For example, a cost-plus contract would likely be used if it is probable that costs for a given project will be less than anticipated.
Likewise, in a situation where the costs of a project cannot be adequately estimated at the beginning of a project, a cost-plus contract can provide the flexibility and security needed.
As an example...
Let’s say Smith’s Construction Corp. is contracted to build a $10 million retail building.
The owner and Smith’s Construction Corp. have set up a 12% profit agreement while limiting expenses to $11 million.
If Smith’s Construction Corp. finishes the project ahead of schedule, they’ll be eligible for an incentive fee on top of their 12% profit of $1.2 million.
Assuming Smith’s Construction Corp. keeps a proper record of expenses and completes the project on the agreed-upon deadline, they will be reimbursed the $10 million they had to front, in addition to a 12% profit.
Both parties are pleased and have successfully fulfilled a cost-plus contract.
If you’re looking for a cost-plus construction contract template, there are many available to download.
You can find examples of an AIA cost-plus contract or other types of contract templates online.
But keep in mind…
Any standard, downloadable cost-plus contract will not take into account the necessary legal language and specifics of the client or your project which can leave a lot of room for human error — something very important to watch out for.
Besides, some cost-plus contract language can be hard to understand and can become especially tricky when particular forms or specific language are needed in certain states or even counties.
If just one word is off in a contract, the other party can use that to void the contract and refuse to pay.
That’s where Flexbase can help.
We know that the language in a contract is extremely important.
But…
We also know that legal help can be very expensive and time-consuming.
Flexbase can automatically provide you with the forms you need that are compliant with your state’s laws and regulations — automatically removing human error at the same time.
Flexbase knows that every project is unique.
That’s why we’ve created an option for users to customize free cost-plus construction templates for their projects.
Let Flexbase help you complete your cost-plus contract and streamline the billing process as a whole.
