07 april

What is a cost-plus construction contract?

The name alone probably gives you a good idea of what a cost-plus contract is. Instead of receiving a lump sum at the end of the project, a cost-plus construction contract stipulates that contractors are reimbursed for project costs and receive a certain amount of profit from the project. For this reason, contractors frequently refer to these contracts as a “cost reimbursement contract.”

Why do contractors use these types of contracts?

In the construction industry, it’s standard for contractors to procure their own materials. This may seem to place an unusual burden on the contractor in question, but there is a reason for it. Contractors have a lot more knowledge when it comes to what they require for any given project, how much it should cost, and what the quality should be. Leaving these types of decisions to the contractor only makes sense.

Additionally, individuals in the field service industry generally develop their own networks, which usually include suppliers. This means that they often have a much better rapport with these suppliers which can often help them fetch better prices and faster delivery times.

Still, though, there are downsides as well. The biggest one is cost fluctuation. The price you pay today may not be the price you pay tomorrow. And when you’re dealing with massive amounts of product at once, that difference can be tens of thousands of dollars.

Even outside of cost fluctuation, some projects take so much time that there are bound to be some issues. The solutions to these issues could be as simple as replacing a window or as complicated as rebuilding entire floors. For these sorts of projects, a cost-plus contract goes a long way in protecting contractors.

This is part of why cost-plus construction contracts have seen a rise in popularity. They aim to protect contractors and ensure they receive a fair price for the project at hand.

Different types of cost-plus contracts

Not all cost-plus contracts are the same. Broadly speaking, there are four different types, each with its own set of guideline(s). Cost-plus fixed fee (CPFF) contracts state that contractors will receive reimbursement for materials used alongside a flat fee. Generally speaking, these contracts cover both direct and indirect costs.

Cost-plus fixed incentive fee (CPIF) contracts, as the name suggests, provide incentives to contractors. These incentives could be reaching deadlines early, cutting costs, etc. If contractors meet these incentives, they will receive extra pay.

Cost-plus award fee (CPAF) contracts offer additional pay regarding the quality or speed of work. Generally speaking, employers calculate this additional pay using an agreed-upon formula. Once the agreement is in place, this formula is typically unalterable.

Cost-plus percentage of cost (CPPC) contracts can be a bit tricky to understand. These contracts stipulate that the contractor receives a percentage of the incurred costs as profit. Before signing these contracts, both parties agree on a percentage, as well as what classifies as “costs.”