A cost plus construction contract is a type of agreement used in the construction industry, where the contractor is paid for the actual costs of the project plus a predetermined profit margin. This type of contract is usually used when the project is more complex or custom-made, and the final cost is not easy to estimate.
How does a cost plus construction contract work?
In a cost plus construction contract, the contractor is paid for the actual costs incurred during the construction process, including labor, materials, equipment, and other expenses. In addition, the contractor receives a predetermined profit margin that is agreed upon before the start of the project.
The profit margin can be a fixed amount or a percentage of the total cost. In some cases, it may also be adjusted based on the completion of specific milestones or phases of the project. The profit margin is intended to compensate the contractor for their time, expertise, and efforts in completing the project.
The cost plus contract may include a cap on the total cost of the project to protect the owner from unexpected expenses. If the actual cost of the project exceeds the cap, the contractor will be responsible for covering the additional costs themselves. Alternatively, the contract may allow for the owner to negotiate a change order to increase the cap or adjust the scope of the project.
Advantages of a cost plus construction contract:
One of the primary advantages of a cost plus construction contract is that it provides transparency and accountability throughout the construction process. The owner has access to all of the project`s costs and can monitor the progress of the project to ensure it remains on budget.
Another advantage is that a cost plus contract allows for greater flexibility in the scope of the project. This can be particularly valuable for projects with unusual or complex design requirements, where the final cost is difficult to estimate upfront.
Disadvantages of a cost plus construction contract:
One of the primary disadvantages of a cost plus construction contract is that it can be more expensive than other types of contracts. Since the contractor is paid for all of the actual costs of the project, there is less incentive to be efficient or keep costs down.
In addition, a cost plus contract can create conflicts of interest between the owner and the contractor. For example, the contractor may have an incentive to add unnecessary expenses to the project to increase their profit margin.
Conclusion:
A cost plus construction contract can be an effective way to manage more complex or custom-made construction projects. However, it is important to carefully consider the pros and cons of this type of contract before entering into an agreement. By understanding the cost plus contract`s terms, both the owner and the contractor can ensure that the project is completed successfully and within budget.