Introduction to Cost Plus Construction
Cost plus construction is a contract type where the contractor is reimbursed for all expenses related to the project, plus an additional fee for their services. This fee can be a fixed amount or a percentage of the total costs.
The cost plus approach is commonly used in construction projects where the scope of work is uncertain or the project involves complex tasks that are difficult to estimate.
How Cost Plus Fees Work
The cost plus fee is typically calculated as a percentage of the total construction costs, which includes labor, materials, and equipment. The percentage can vary depending on the project and the contractor's level of expertise.
For example, a contractor may charge a 10% fee on top of the total construction costs, which means that if the project costs $100,000, the contractor would earn an additional $10,000 as their fee.
Risks Associated with Cost Plus Construction
One of the main risks associated with cost plus construction is the potential for cost overruns, as the contractor has no incentive to control costs. This can result in significant additional expenses for the project owner.
Another risk is the lack of transparency in the contractor's accounting and record-keeping, which can make it difficult for the project owner to verify the accuracy of the costs and fees claimed by the contractor.
Benefits of Cost Plus Construction
Despite the risks, cost plus construction can offer several benefits, including the ability to start a project quickly without having to wait for a detailed estimate of the costs. This approach can also be beneficial for projects with complex or uncertain scopes of work.
Additionally, cost plus construction can provide an incentive for the contractor to work efficiently and complete the project as quickly as possible, as they can earn their fee sooner.
Mitigating Risks in Cost Plus Construction
To mitigate the risks associated with cost plus construction, project owners can implement various measures, such as regular audits and monitoring of the contractor's accounting and record-keeping.
Project owners can also negotiate a guaranteed maximum price or a not-to-exceed clause in the contract, which can provide a level of cost certainty and protection against cost overruns.
Frequently Asked Questions
What is the main advantage of cost plus construction?
The main advantage is the ability to start a project quickly without waiting for a detailed estimate of costs.
How is the cost plus fee typically calculated?
The fee is typically calculated as a percentage of the total construction costs, which includes labor, materials, and equipment.
What is the main risk associated with cost plus construction?
The main risk is the potential for cost overruns, as the contractor has no incentive to control costs.
Can cost plus construction be beneficial for complex projects?
Yes, cost plus construction can be beneficial for projects with complex or uncertain scopes of work.
How can project owners mitigate the risks of cost plus construction?
Project owners can implement measures such as regular audits and monitoring of the contractor's accounting and record-keeping.
What is a guaranteed maximum price in cost plus construction?
A guaranteed maximum price is a clause in the contract that provides a level of cost certainty and protection against cost overruns.