How Cost Plus Pricing Works in Construction
Cost plus pricing is a pricing strategy commonly 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. This fee or percentage is typically negotiated upfront and is included in the contract. Cost plus pricing is often used in construction projects where the scope of work is not well defined, or where changes to the scope of work are expected. In this article, we will explore how cost plus pricing works in construction projects and the benefits and drawbacks of this pricing model.
How Does Cost Plus Pricing Work?
Cost plus pricing works by adding a fee or percentage to the actual cost of the work. The contractor keeps track of all costs incurred during the project, including labour, materials, equipment, and other expenses. These costs are then presented to the project owner for reimbursement. In addition to the actual costs, the contractor adds a fee or percentage to cover overhead and profit. This fee or percentage is typically negotiated upfront and is included in the contract.
For example, let's say a contractor is hired to build a house using a cost plus pricing model. The contractor keeps track of all costs incurred during the project, including labour, materials, equipment, and other expenses. At the end of the project, the contractor presents the project owner with a detailed breakdown of all costs incurred. The contractor then adds a fee or percentage for overhead and profit, which was agreed upon before the project began. The final cost of the project is the sum of the actual costs and the fee or percentage for overhead and profit.
Benefits of Cost Plus Pricing
Flexibility: Cost plus pricing provides 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.
Transparency: Cost plus pricing provides 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.
Collaboration: Cost plus pricing encourages collaboration between the contractor and the project owner. Both parties have a shared interest in controlling costs and delivering a quality project.
Drawbacks of Cost Plus Pricing
Uncertainty: Cost plus pricing 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.
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.
Incentives: Cost plus pricing 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.
Conclusion
Cost plus pricing is a pricing model commonly used in construction projects. It provides flexibility and transparency to the project owner but can result in uncertainty and disputes. When considering cost plus pricing, it's important to carefully weigh the benefits and drawbacks and work with a reputable contractor. By understanding how cost plus pricing works and the factors to consider, project owners can make informed decisions and achieve successful construction projects.
