A cost-plus contract allows a contractor to be paid for all expenses up to a set limit, with the possibility of additional compensation. There are four variations, including a fixed fee, incentive rate, award fee, and percentage of cost agreement. This type of contract is more common in business and government agencies, but may be suitable for those prioritizing quality over price.
Sometimes called a cost-reimbursement contract, a cost-plus contract is a legal agreement that allows a contractor to be paid in full for all expenses allowed by the terms of the contract, up to a set limit that is defined in the terms and conditions. . In addition, the contractor may also receive additional compensation that will ensure that a profit is made on the job. There are several variations on this type of contract in common use today.
The provisions of the cost plus contract are different from those associated with the fixed price contract. With the latter, the contractor agrees to charge only a specified amount for the work covered by the terms and conditions outlined in the agreement. If the actual expenses exceed the costs associated with fulfilling the obligation set forth in the agreement, the contractor may not pass those costs on to the client. Instead, the contractor must absorb those costs, which may result in a net loss on the project.
Four common variations of the plus-cost contract are in use today. The cost plus fixed fee contract allows the contractor to collect a fixed amount of compensation at a specified time during the project. Additional expenses and fees are billed at a later date.
The cost plus incentive rate contract is yet another form of cost contract that can sometimes be advantageous to the customer. With this agreement, the contractor receives a higher rate for saving money in materials or labor associated with meeting the terms of the agreement. However, the higher fee can sometimes offset the savings.
A cost plus award fee agreement is a type of cost plus contract that will award a bonus if the contractor demonstrates performance that is considered to be in excess of the terms of the contract. The adjudication of this fee is generally left to a third party, such as a review board. Cost-plus contract agreements of this type are much more common when contracting out work for businesses and government agencies, but are rarely used for residential construction, such as home construction or renovations.
A final variance of the cost plus contract is known as the cost plus percentage of cost agreement. Essentially, this type of contract makes it possible for the contractor to adjust the charges for materials upward if the market price of those materials increases. This is one of the least favorable forms of the plus cost agreement, as it provides no incentive for the contractor to keep expenses within the range originally defined in the agreement.
Many people and companies prefer to go with a fixed price contract simply because there is more control on the part of the customer. Extra cost contracts generally do not provide any motivation for the contractor to monitor costs closely. However, if quality over price is the customer’s primary goal, a cost-plus construction contract is likely to be the best option.
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