Cost-Plus Building Contracts

Jul 9, 2024

Cost-Plus Building Contracts

What is a cost-plus building contract?

A cost-plus building contract entails the project owner covering all construction expenses, including direct and indirect costs, and paying an additional profit margin to the contractor. This profit margin is usually determined by a predefined percentage to account for overhead. This type of contract offers significant convenience for contractors, as it allows them to account for both direct and indirect construction costs while providing a profit margin.

How Does a Cost-Plus Building Contract Work?

In a cost-plus contract, the contractor is responsible for sourcing materials, staff, and necessary resources at every project stage. They pass the actual costs to the owner and calculate a predetermined profit margin. The cost comprises labor (calculated using the hourly rate and hours worked) and necessary expenses like materials. The contractor provides invoices if needed, and a fixed profit margin is claimed at specific intervals.

Cost-Plus vs. Fixed Price Building Contracts

The main differences between cost-plus and fixed price building contracts lie in cost management and flexibility. Fixed price contracts have a predefined price for the entire project, and the contractor must manage all actual costs within this budget. If costs exceed the budget, the contractor must cover the excess. In contrast, cost-plus contracts allow for flexibility in project costs, which are not capped, enabling projects to be more agile. However, contractors must meticulously document all costs received from suppliers.

Advantages and Disadvantages of Cost-Plus Contracts

Advantages:

  • Project costs are not capped.
  • Allows for flexibility and agility in projects.
  • Owners can closely monitor costs at each stage.
  • Better cost control from the owner’s perspective.

Disadvantages:

  • Contractors must document all costs meticulously.
  • Owners aim to keep costs low, which may not always be feasible.
  • Contractors need to fund materials before receiving reimbursement.
  • Predicting total project costs in advance can be difficult.

Example of a Cost-Plus Contract

Consider a contractor hired to renovate a building with a cost-plus agreement at a 10% profit margin. The direct costs include labor costs of $20,000, material costs of $50,000, and other direct expenses of $5,000, totaling $75,000. The profit margin would be $75,000 * 10% = $7,500, making the total contract amount $82,500.

Charges for Cost-Plus Contracts

Charges for cost-plus contracts vary based on the project’s scope, work volume, builder’s reputation, and regional construction market. Generally, builders charge for labor (hourly rate multiplied by hours worked), direct project costs (materials, permits, subcontractor fees), and a predetermined profit margin, typically set at 10% or 20% of the total project cost.

Residential vs. Commercial Cost-Plus Contracts

Cost-plus contracts differ for residential and commercial buildings. Residential contracts often account for unique homeowner requirements and property size, while commercial contracts involve complex requirements, larger budgets, and compliance issues. Profit margins in commercial contracts may consider complexity and anticipated project risks.

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