Benefits and Risks of Using Cost Plus Contracts in Construction

Cost plus contracts are a popular pricing model used in construction projects. In this pricing model, the contractor is reimbursed for the actual cost of the work, plus a fee or percentage for overhead and profit. While cost plus contracts provide flexibility and transparency to the project owner, they also present certain risks. In this article, we will explore the benefits and risks of using cost plus contracts in construction.

Benefits of Using Cost Plus Contracts

1. Flexibility: Cost plus contracts provide flexibility to the project owner in terms of changes to the scope of work. Since the project owner is only paying for the actual costs incurred, changes to the scope of work can be accommodated more easily.

2. Transparency: Cost plus contracts provide transparency to the project owner in terms of the actual costs incurred. The contractor is required to keep track of all costs and provide a detailed breakdown to the project owner.

3. Collaboration: Cost plus contracts encourage collaboration between the contractor and the project owner. Both parties have a shared interest in controlling costs and delivering a quality project.

4. Quality Work: Cost plus contracts may encourage contractors to do higher quality work since the focus is on delivering the best work possible, rather than keeping costs low.

Risks of Using Cost Plus Contracts

1. Uncertainty: Cost plus contracts can result in uncertainty for the project owner in terms of the final cost of the project. Since the final cost is dependent on the actual costs incurred, it can be difficult to predict the final cost of the project.

2. Potential for Disputes: Disputes can arise between the contractor and the project owner over the actual costs incurred and the fee or percentage for overhead and profit.

3. Incentives: Cost plus contracts may not provide the contractor with the same incentives to control costs as a fixed price contract. Since the contractor is reimbursed for the actual costs incurred, there may be less of an incentive to minimize costs.

4. Cost Overruns: Cost plus contracts may result in higher costs than expected since the contractor is reimbursed for the actual costs incurred. This can lead to cost overruns and project delays.

Conclusion

Cost plus contracts can provide flexibility and transparency to the project owner but present certain risks. When considering cost plus contracts, it's important to carefully weigh the benefits and risks and work with a reputable contractor. By understanding the benefits and risks of using cost plus contracts in construction, project owners can make informed decisions and achieve successful construction projects.