What does it mean when a contractor says cost-plus?

Unlike a fixed-cost construction contract, a cost-plus construction agreement is a contract in which the owner pays the contractor the actual costs of the materials and labor plus an additional negotiated fee or percentage over that amount.

How does cost-plus contract work?

A cost-plus contract is one in which the contractor is paid for all of a project’s expenses plus an additional fee for the job. The additional fee is intended to be the contractor’s profit.

What is cost-plus pricing construction?

Related Content. A pricing mechanism in construction contracts in which the contractor is paid both: The actual cost of performing the physical work. A fee for the contractor’s overhead and profit.

What are the disadvantages of cost-plus contract?

Cost Plus Contract Disadvantages For the buyer, the major disadvantage of this type of contract is the risk for paying much more than expected on materials. The contractor also has less incentive to be efficient since they will profit either way.

How does cost plus work when building a house?

A cost-plus contract, also known as a cost-reimbursement contract, is a form of contract wherein the contractor is paid for all of their construction-related expenses. Plus, the contractor is paid a specific agreed-upon amount for profit. That’s the “plus”!

What is cost plus with upset?

Upset price. One way of establishing an upper limit while retaining the flexibility of a cost-plus arrangement is to get the contractor to agree to do the work on what is known as an “upset price” basis. This means that you both agree to a maximum price before he begins the job. Then he proceeds on a cost-plus basis.

What is a disadvantage of a cost-plus fixed fee contract?

Disadvantages of cost-plus fixed-fee contracts may include: The final, overall cost may not be very clear at the beginning of negotiations. May require additional administration or oversight of the project to ensure that the contractor is factoring in the various cost factors.

What is cost plus contract discuss its advantages and disadvantages?

Allows the focus to shift from overall cost to quality of work done. Covers the entire expenses related to project. It can be used to put a limit or cap on the amount of money that the contractor can spend on a project. Contractor gets flexibility. Budget friednly contract.

What is the difference between a turnkey contract and a cost-plus contract?

Cost plus contracts are generally reserved for more complex projects, since there are multiple selections and decisions that need to be made throughout the process. Turnkey contracts require an estimate with very detailed specifications prior to starting the job. It provides a fixed amount that sets the budget.

What are the advantages of a cost-plus contract?

How do you calculate cost plus pricing?

The cost-plus pricing formula is calculated by adding material, labor, and overhead costs and multiplying it by (1 + the markup amount).

Is cost plus a good idea?

When implemented with forethought and prudence, cost-plus pricing can lead to powerful differentiation, greater customer trust, reduced risk of price wars, and steady, predictable profits for the company. No pricing method is easier to communicate or to justify.

When to use a cost plus construction contract?

Decisions like whether or not to use the best materials become easier when the cost won’t come out of the contractor’s paycheck. Plus, if putting together an estimate for a job proves to be challenging, a cost-plus contract can help.

How does a cost plus with guaranteed maximum price ( GMP ) work?

A Cost Plus with Guaranteed Maximum Price (GMP) Contract is one of the Reimbursable Contract types, while the traditional cost-plus agreement does not have a fixed budget, an owner and contractor often agree to cap the price once the project design and engineering is substantially complete.

Who is responsible for excess cost under GMP contract?

Under a GMP Agreement, a contractor is responsible for the difference of the exceeding capped amount, and if the total cost of the project is below the capped cost, the owner and contractor often agree to a shared saving benefit. Posted in Management and tagged contract, definition, management, project, reimbursable .

Can a contractor pad the price for uncertainty?

For jobs with a lot unknowns, contractor does not have to pad the price for uncertainty. Can get started quickly on jobs with many unknowns and incomplete plans. You pay only for work completed, with open books, at a known rate. Contractor has little incentive to keep costs down.