Cost-plus contracts are becoming an increasingly popular choice in the construction industry. These contracts offer transparency and flexibility, making them an attractive option for projects where scope and costs may evolve over time. But what exactly is a cost-plus contract, and how does it differ from other agreements?

Today, we’ll cover the definition, types, advantages, disadvantages, and how they compare to other contracts in construction. By the end, you’ll understand whether this type of agreement is right for your next project.

What is a Cost-Plus Contract in Construction?

A cost-plus contract is a legal construction agreement where the project owner pays the contractor for actual costs incurred, such as labor, materials, and equipment, and additional fee for overhead and profit.

This contract is designed for scenarios where transparency and adaptability are essential. Unlike fixed-price or lump sum contracts, cost-plus contracts allow for more open-ended adjustments, making them ideal for projects with uncertain scopes or evolving designs. These contracts are widely used to promote trust and collaboration between the contractor and the project owner.

Cost-plus contracts stand out for their ability to:

• Adjust to design or scope changes mid-project without significant renegotiations.
• Offer a detailed breakdown of costs, ensuring owners understand where every dollar goes.
• Support complex projects where unforeseen variables are common.

For project owners and contractors alike, this agreement provides a solid framework for managing costs while encouraging open communication.

How Do Cost-Plus Contracts Work?

Cost-plus contracts works by ensuring the contractor is paid for all documented project expenses, along with a fee for their services.

Once the agreement is in place, the contractor begins work and tracks every expense, including labor hours, materials purchased, equipment rentals, and other project-related costs. These are categorized as “reimbursable costs.” The contractor is required to submit regular documentation, such as receipts and invoices, to verify these expenses.

In addition to reimbursable costs, the contractor earns a fee, which could be:

• A fixed dollar amount.
• A percentage of the total project costs.
• An incentive or award fee tied to specific performance goals.

This arrangement promotes openness because the project owner may carefully monitor costs and make informed decisions. Contractors gain from lower financial risk since they know they will be compensated for all eligible charges.

4 Types of Cost-Plus Contracts

Cost-plus contracts can be divided into four categories. Each allows for both reimbursement of costs and an additional profit amount:

1. Cost-Plus Fixed-Fee Contracts (CPFF):
   A fixed fee is paid to the contractor, regardless of project cost fluctuations. This type is suitable for projects with relatively predictable timelines or well-defined objectives.
2. Cost-Plus Percentage-of-Cost Contracts (CPPF):
   The contractor’s fee is calculated as a percentage of total costs. This option is often used for smaller projects where flexibility is essential.
3. Cost-Plus Incentive Fee Contracts (CPIF):
   Incentives are provided for meeting or exceeding specific goals, such as completing the project ahead of schedule or under budget. It encourages contractors to optimize efficiency.
4. Cost-Plus Award Fee Contracts (CPAF):
   A subjective fee is awarded based on the contractor’s performance, evaluated by the project owner. This type prioritizes quality and collaboration.

Advantages of Cost-Plus Contracts

It’s important to note that cost-plus contracts can benefit both parties uniquely. The advantages depend on whether you’re a project owner or a contractor.

Project Owners	Contractors
Easier Negotiations Projects start faster since contractors are assured costs are covered.	Lower Financial Risk Contractors are assured reimbursement for all project costs.
Transparency in Costs Owners see a detailed breakdown of where money is spent.	Guaranteed Fee Contractors receive a predetermined fee regardless of the total project cost.
Flexibility for Changes Design or scope changes are easier to accommodate.	Encourages Quality Work No pressure to cut corners since costs are reimbursed.
Lower Initial Estimates Competitive initial pricing without inflated contingencies.	Fosters Collaboration Open communication strengthens contractor-owner relationships.
Trust and Collaboration Encourages teamwork and open communication between owners and contractors.	Easier Documentation Detailed records make payments transparent and reduce disputes.

Disadvantages of Cost-Plus Contracts

While cost-plus contracts offer advantages, they also have challenges. Each party faces unique risks that should be carefully considered.

Project Owners	Contractors
Uncertain Total Costs Final project costs are not fixed, which can lead to overruns.	Increased Documentation Requires maintaining detailed records of expenses.
Administrative Burden Requires frequent review of contractor records and invoices.	Dependence on Owner Trust Misunderstandings can damage relationships and delay payments.
Potential Mismanagement Inexperienced contractors may struggle with transparency and documentation.	Uncertain Profit Margins Incentive fees or percentage fees depend on project cost fluctuations.
Risk of Disputes Disagreements over what qualifies as reimbursable costs.	Higher Administrative Costs Maintaining records and frequent reporting increases workload.

Example of Cost-Plus Contract

Let’s take a look at an example of a cost-plus contract for a hypothetical construction project.

MetroWorks Construction, a full-service general contracting company, took on a challenging commercial office renovation project for a growing tech startup, BrightSpace Solutions. Initially, the project was based on a traditional office layout, but halfway through, the startup’s leadership decided to switch to an open-concept design with upgraded materials and cutting-edge tech integrations. The project was governed by a cost-plus fixed-fee contract, allowing both parties to navigate these changes seamlessly.

The contract provided MetroWorks with the flexibility to accommodate BrightSpace’s evolving needs without delaying the timeline. For example, when sourcing new materials, MetroWorks kept detailed records of every purchase, providing transparency through regular reports. BrightSpace appreciated the clear communication and had confidence in every decision.

To ensure accountability, the contract included a retainage clause, withholding 10% of payments until the punch list items, like final paint touch-ups and system testing, were completed. This arrangement motivated MetroWorks to finalize the remaining details promptly and to the client’s satisfaction.

By the end of the project, both parties expressed satisfaction with the process. The flexibility and transparency offered by the cost-plus structure ensured the project adapted smoothly to BrightSpace’s unique vision, resulting in a cutting-edge workspace that exceeded expectations.

Cost-Plus Contracts vs. Other Construction Contracts

Choosing the right construction contract can make or break a project. Let’s see how cost-plus contracts stack up against other popular options.

1. Fixed-Price Contract
   Fixed-price contracts, also known as lump-sum contract, offer a predetermined cost for the entire project. While they provide cost certainty, they lack the flexibility of cost-plus contracts, making them less suitable for projects with changing scopes.
2. Time and Materials Contract
   Time and materials contracts reimburse contractors for labor and materials. However, they lack the structured fee system of cost-plus contracts, which can lead to less predictable contractor earnings.
3. Unit Price Contract
   These contracts calculate costs based on the price of individual work units. They offer some flexibility but don’t match the detailed cost tracking and collaborative nature of cost-plus contracts.
4. Guaranteed Maximum Price (GMP)
   GMP contracts combine cost-plus terms with a spending cap, balancing cost control with flexibility. While more predictable than pure cost-plus contracts, they may limit adaptability for significant scope changes.
5. Design-Build Contract
   Design-build contracts streamline processes by combining design and construction responsibilities under one entity. However, they prioritize efficiency over the transparency and collaborative decision-making seen in cost-plus contracts.

While there’s no perfect construction contract, the key is finding the one that best suits your project’s needs. Cost-plus contracts offer the flexibility and transparency that can be a real advantage for projects that evolve over time. But it’s important to consider all your options, like fixed-price, time and materials, or GMP contracts, to see which one works best for you. By understanding your project’s unique needs, you can choose the right contract that sets you up for success.

Cost-Plus Contracts FAQs

Is a Cost-Plus Contract the Right Choice for Your Project?

Cost-plus contracts offer flexibility and transparency, making them ideal for complex, evolving projects. While they come with challenges like potential cost overruns and increased administration, their adaptability and detailed cost tracking often outweigh these risks.

For example, the Boston Central Artery/Tunnel Project (Big Dig) is a well-known case where cost-plus contracts were used to manage unforeseen challenges and design changes. This project demonstrated how cost-plus contracts can accommodate evolving project scopes and unforeseen issues, making them a suitable choice for large-scale infrastructure projects.

Whether you’re a project owner or contractor, understanding cost-plus contracts can help you make better decisions. For a streamlined approach to managing contracts and project details, Builtfront offers an intuitive construction management software system that simplifies tracking, communication, and overall project management. Explore how Builtfront can enhance your construction projects today!