Cost-Plus Contracts  

A cost-plus construction contract generally obligates the owner to pay for the costs associated with the construction project and a fee for the contractor's services on the project. The contractor's fee can either be fixed or based on a percentage of the project's costs. Cost-plus contracts are usually the product of negotiations between the owner and contractor instead of the bidding process.

Generally, contractors have little incentive to keep costs down when their fee is tied to the amount of costs for the project. Therefore, a guaranteed maximum price provision is normally an important negotiating point for the parties. As an incentive to keep costs in check, owners may include a provision for the payment of a bonus fee should the contractor partner with the owner in the desire to contain costs. By including a provision providing for an additional fee should the total project costs come under the guaranteed maximum price, the project cost goals for the contractor and owner are aligned.

Cost-plus contracts are not right for every construction situation. Circumstances that make the use of a cost-plus contract attractive include those where a part of the work cannot be adequately priced or when construction must commence before the plans and specifications have been completed. Such circumstances are certainly not ideal and present dangers to both the owner and contractor. Therefore, the parties must specifically as possible determine the scope of work required, identifying the expectations of the parties to the best of their abilities. To avoid potential payment disputes, it must be clearly established what costs are expected to be incurred, what allowances are made for unexpected costs, what costs will form the basis for calculation of the contractor's fee, and the like.