What is a Cost-Plus Contract in Construction?

Yes! A homeowner can certainly negotiate a contract that involves all four major aspects discussed above. A contract can have an Incentive to beat the schedule, an award for Jobsite cleanliness and safety, a fixed fee, and a fixed rate if the project expands above and beyond a limit of the original scope. Lastly, a common clause in a Cost-Plus Contract is the GMP or Guaranteed Maximum Price. A GMP stipulates a maximum dollar amount that the project cannot exceed. Once it exceeds this value, the contractor covers the difference, and the owner is locked into that GMP.

Pros and cons to a Cost-Plus Contract

  1. Lower the risk for the contractor
  1. The final cost is left in the air. This leaves uncertainty to the owner
  1. The focus is shifted from the money to the quality of work performed
  1. The work can start sooner but if the schedule and selections are not pushed, a longer project schedule can come about.
  1. The owner pays only for the work performed plus any incentive bonuses.
  1. Costs are presented in reports leading to potential disputes about cost-relating billing
  1. A final scope is not needed to start work, reducing the overall schedule.
  1. Requires additional resources for the contractor to generate document trails and for the owner to review such documents.
  1. Allows for scope creep if the budget and projected budget are not closely managed.

When should a Cost Plus Contract be used?

A cost-plus contract should be utilized when there is a design-build aspect of the project, or the project has an unknown variable. During the writing of this article in the fall of 2021, material prices are still fluctuating on a weekly, basis. Some materials are rising like metals and PVCs, while lumber has seen a recent drop and hold. Homeowners have gravitated to the Cost-Plus model in 2020 due to the belief that material prices will fall during their project. Contractors have also agreed to this model since they hold much less risk than a stipulated sum contract.

Wrapping it up!

In the end, a Cost-Plus contract is simply a tool to be utilized to get the work done. In some respects, it presents clarity to pricing and costs to the owner. On the other hand, the contractor can have less incentive to drive the schedule and cut costs. The quality of work might be higher as the contractor can focus on this but is not certain. A great general contractor will push quality regardless of the circumstances. If your project is in the design phase, not certain of what your layout is to be or the finishes, the Cost-Plus model might be the perfect fit for you! Just be sure to make sure to negotiate the contract to include what matters most to you and be ready for extra legwork to manage the document trail the contractor should be sending your way.

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