Cost Plus Contracts are used when the scope of the project is not well-defined, or when flexibility for changes is needed during the project execution. This contract type encourages transparency and can foster a collaborative relationship between the owner and contractor, as it allows for adjustments to work scope without renegotiating the entire contract.
Key components and considerations of a Cost Plus Contract include:
- Direct Costs: These include costs directly tied to the construction work, such as labor, materials, equipment, and subcontractor expenses. The contractor is reimbursed for all incurred direct costs.
- Indirect Costs: Also known as overhead, these costs are not directly linked to a specific construction activity but are necessary for the project's execution, including office expenses, utilities, and salaries of the contractor's management staff.
- Fee: The contractor's profit, which is in addition to the costs. The fee can be structured in various ways, such as a fixed amount, a percentage of the costs, or based on achieving certain project performance metrics.
- Cost Control and Reporting: Given that the contractor is reimbursed for incurred costs, there are mechanisms in place for cost monitoring and control, including detailed record-keeping, regular financial reporting to the owner, and audits.
- Limitations or Cap: Some Cost Plus Contracts include a guaranteed maximum price (GMP) or a not-to-exceed clause to limit the owner’s financial exposure. The contractor is responsible for managing costs to stay within this limit.
- Changes in Work Scope: The contract allows for flexibility in handling changes in work scope, making it easier to accommodate modifications without renegotiating the entire agreement.
- Risk Management: While this contract type shifts some risk of cost overruns from the owner to the contractor, especially with a GMP clause, it also requires a high level of trust in the contractor's ability to manage the project efficiently and cost-effectively
