Cost Plus

This contracting method can take one of several forms. Typically, it is one in which the contractor agrees to perform the work for direct costs plus a negotiated percentage mark up. The costs are considered to include all materials, equipment, and labor (often not including general supervisory or overhead staff labor). This method can be modified by agreeing upon a fixed fee in lieu of a percentage mark up. A simple form of this contract is also known as a time and materials (T&M) contract, in which the contractor passes through the cost of the material (sometimes with mark up, depending on the agreement) and bills the owner for labor provided at its current or negotiated billing rates.

A cost plus contract is a good option in time-sensitive, emergency, or other fast-track situations, when there is not adequate time to prepare complete plans and specifications, especially in the case of very small projects. It may also be a good option when there are many unforeseen conditions, such as tunneling or foundation work. The contractor, in this case, is responsible for maintaining clear and accurate records of project expenditures and providing those records to the owner for payment.

A disadvantage is that this contracting method does not allow for knowledge of the final cost of the project until the project is complete. Not knowing the final cost presents budgeting difficulties and the open-ended risk can negatively impact raising of project funding. Scheduling and other difficulties may also arise due to the uncertainty of the project completion date. These risks can be somewhat mitigated if a cost plus fixed fee arrangement is considered, in which the contractor is obligated to complete the work for the stipulated fee regardless of the final cost of the job. This arrangement will also often motivate the contractor to complete the project as expeditiously as possible, presumably to move its staff on to other projects.

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