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A cost-plus-contract refers to a contract when the contractor gets paid for all construction related expenses

as previously agreed. Some cost-plus-contract can be drafted to set a limit that will be used to restraint the
contractor on not to exceed that specified amount. The termplus refers to the profit allowed to be earned
by the contractor. A cost-plus-contract provide a win-win situation for the contractor, because all risks are
basically covered, and all expenses are likely to be paid.

Cost Plus: What to Charge on a Cost-Plus Contract?


A cost-plus-contract is a tool that the contractor uses to get paid for almost every expense related to the
construction job. However, the contractor must justify and present evidence that justifies that the cost
is related to the job. Furthermore, the contractor could be denied to recover associated costs if a
negligence act or other relevant error is attributable to contractor's responsibility.
The three main components of a Cost-plus-contract are:
1.

Direct Costs: Labor, materials, supplies, equipment and professional consultants being contracted by
the general contractor.
Hard Costs are tangible assets that you need to acquire to complete your construction project. Usually,
hard costs are easily quantifiable and can be determined with such certain that usually they are
detailed by an experienced estimator. In general, hard costs represent any part of the work or costs
associated with the actual project.
Below is a list of common construction hard costs.

Building Structure- Hard costs associated with the structure. This category includes all labor

and material required to complete the whole building or structure.


Site- The difference from the first one to this, is that this category includes all utilities

underground, aerial, water systems, drains, fire, paving, grading, etc.


Landscape Hard costs related to landscaping works, including grass, lawns, trees, mulch,

shrubs, fertilizer, and every other material included in the construction of the projects based on the
architectural drawings.
Contingency- Contingency is a reserved amount of money covering all estimated unforeseen
conditions that might affect the construction process. Although it is not an amount that you can measure,
it can be estimated from historical data between a five and ten percent of the total project costs
for new projects and between 10 and 20 percent for remodeling projects.

Change Orders- Change orders might be included under the building structure item in the
hard costs. Some builders separate this item from building structure, for accountability
process, but it also includes all additional expenses related to the construction of the project.

2.

Overhead Costs (or Indirect Costs): Business related expenses that are necessary to perform the
contract. Overhead costs are usually a percentage of labor costs and can include office rent, insurances,
office supply, communication expenses, mileage and drawing printing or reproduction.
How to Reduce Your Overhead Costs
Reducing overhead costs can save you thousands of dollars. There are multiple ways to reduce your
overhead costs and still be productive. Overhead are accountable for large money quantities that

can make the difference in your operational costs. Here we present some ideas on how to cut or
reduce your overhead costs.

Vehicle Fleet
If you have a large vehicle and truck fleet, you need to study their consumption and
how operating costs are getting larger. Analyze the quantity and size of your fleet and
determine if you need to sell those unused vehicles or trucks in the other hand if you need to
replace those old vehicles with newer or more efficient ones. In addition, for those employees who
need a company pickup, parking it at the contractor's place of business overnight is now becoming
commonplace to discourage personal use of company assets.
Go Green
The same rigorous environmental standards that people are beginning to use at home could be
applied on the business premises. Any item that can be reused--disks, paper, folders and so on-should be reused. Items that cannot be reused should be recycled whenever possible. This will not
only cut your purchasing costs, it could also reduce your trash collection bill.
Incentives
If an employee comes to you with a savvy solution, credit him for coming up with a costcutting idea that saves your company money. Creating incentive plans for beneficial ideas such as
employee discounts, added time off, free lunch for a week in the company cafeteria, or even a cash
bonus may win greater favor and support than just an honorable mention in the company
newsletter.
Negotiate Contracts
Times are difficult for everyone in the construction industry. Develop stronger relationships with
fewer suppliers who are not focused on maximizing current margins, but on creating long term
relationships. Also try to contact that old friend that you can really talk with him with open books. A
good friend sometimes can get better and discounted prices for you.
New Technology
Investigate ways that your company can do things faster at a reduced cost. Make sure your
practices and procedures are up-to-date and look for streamlined processes. Incorporateenergyefficient lighting and cleaner ways to operate into the plan.
Multipurpose Labors
In difficult economic market times, we are all trying to do more with less. Maximum productivity
from each employee is the goal. Identify, look or hire workers that can serve in multiple
roles and eliminate downtime while they are waiting on another key task in the critical path of
construction to complete.

Change Orders
Contractors love to build! Prior to get that extra work or change order done, analyze the
circumstances and why that change is occurring. Invest in a tightly controlled change order process
to ensure that work done beyond the scope of the contract will be well-documented and approved
prior to incurring additional costs.
Transaction Taxes
Construction materials can be purchased tax-free and then warehoused until needed for a
construction contract. Transaction taxes are not due until they are transferred to the entity
performing the construction, normally resulting in an immediate cash saving by delaying the
payment of tax. A side benefit to a purchasing company may accrue to the contractor by allowing a
more centralized approach to inventory management.
Spend Money
Spend Money? Key employees need to be cared for and kept happy. Look at long-term
compensation and retention programs to make sure that your key employees stay with you during
tough times. Invest in safety programs to lower workers compensation costs. Sit down with
employees and getting their opinions as to how overhead can best be trimmed.

3.

Fee (or Profit): The profit is usually a fixed percentage based on the labor costs directly
associated with the work.

Cost-Plus-Contract: When to Use It


A cost-plus-contract might be used when budget is being restricted or when there is a high probability
that actual cost might be reduced. This type of contract is preferred when there is no enough data to
perform a detailed estimate of the work, or when the design is not completed. It is also a preferred by
governmental agencies because they can select the contractor based on their qualification, instead of the
low bidder. It is widely used to perform research and development works, because the risk can be
controlled by the contracting officer.
Cost-Plus-Contract: Pros and Cons
A cost-plus-contract have advantages and some drawbacks depending on which side you are, contractor or
project owner.

Advantages
1.

The contractor will not be able to reduce workmanship.

2.

It can focus on quality instead of cost.

3.

It could cover all related expenses.

4.

Contractor's risk is minimized.

Disadvantages:
1.

Present uncertainty to the project owners, because the final cost could not be easily determined.

2.

Requires additional resources and management to reproduce and justify all related costs.

3.

Might lead to disputes when trying to recover construction related expenses.

4.

The project's duration could be longer than expected.

Cost-Plus-Contract: How to Protect Yourself


A Cost-plus-contract presents a great opportunity for the contractor to recover all construction related
expenses. However, if a good record keeping is not enforced, some costs might be irrecoverable. Follow
these simple tips to stay out of trouble.

Read carefully the cost-plus-contract provisions.

Negotiate critical items that could lead to disputes, such as overhead expenses and main office
associated costs.

Control the material usage. A cost-plus-contract can lead to misuse of construction material, so you
might end up acquiring more material than reasonably expected.

Do not take advantage over the project owner. Be honest but beware of exorbitant costs.

Control your 'hard' and 'soft' costs.

Soft Costs constitute a big portion of your construction costs. A construction project is possible due
to the soft costs, that when added to the hard cost and land cost, you will have the total cost
amount for your construction project. Soft costs are traditionally non-seen itemsthat composed the
initial part of developing a construction project.

1. Architectural and Design Fees

By Brock Builders

The architectural and design fee includes costs incurred on feasibility studies, master planning,

design costs, and all other cost included from schematic to project completion.
2. Inspection Fees
Cost of inspections, permits and fees paid to local government.
3. Land Costs

by Neil Ennis

Land costs associated with legal process, appraisal, real estate,land acquisition,

assessments or improvementsto land related issues.


4. Off-Site
Some projects require to improve conditions in their neighborhood or to complete improvements

to local infrastructure.
5. Equipments
Equipments not being incorporated in the final project delivery.
6. Interests
Cost of loan generated interests.
7. Accounting Fees

By Edinburghcityofprint

All accounting expenses and cost incurred during the development of the construction process.
8. Project Management
Staff required to handle all construction related documentation and drawings.
9. Insurances
All required insurances for the completion of the construction project.
10. Taxes
Money required by state and local agencies depending on the amount of money being invested in
the construction.

11. Advertising

By gadgetdude

Marketing and advertising cost including brochures, public relations and general marketing campaigns.
12. Loans

By Omar omar

Construction loan commitment fees, mortgage broker fee, permanent commitment fee.
13. Additional Works and Studies
Including the following items

Additional cost estimates

Surveys

Traffic studies

Geo-technical studies

Testing consultants

Professional services

Health and Safety consultants

Environmental studies and assessments

Home Owners/ Tenant start-up fees.

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Cost-Plus-Contract Variations
Cost-plus-contract can have some variations that will depend on the needs and special circumstances of
each construction projects. Some of the variation of a cost-plus-contract are:

Cost-Plus Incentive Fee - Is a cost-plus contract that provide for incentive fees. Theincentive
fees are based on the contractor's performance and are set under the contract provisions. The
amount and type of incentive could vary depending on the achieve milestone.

Cost-Plus Award Fee.- A cost-plus award fee provides for award fees, predetermined and set forth
under contract documents. The fee could be a penalty or a gratitude fee.

Cost-Plus Fixed Rate Cost-plus contract fixed rate is a contract that set pre-determined labor
rates based on the contractors' history and labor costs. It is a contract used onspecialized
contractors that really know their actual costs, but provide little space for contingencies.

Cost-Plus Fixed Fee - Cost-plus contract that covers direct and indirect costs plus a predetermined fixed fee.

Lump Sum: What Is A Lump Sum?


Lump Sum Construction Contracts
A lump sum contract is normally used in the construction industry to reduce design and contract
administration costs. It is called a Lump Sum because the contractor is required to submit a total and
global price instead of bidding on individual items. A lump sum contract is the most recognized agreement
form on simple and small projects, for example, projects with a well-defined scope or construction projects
where the risk of different site conditions is minimal.

Lump Sum Contract Basics


A lump sum contract or a stipulated sum contract will require that the supplier agree to provide specified
services for a stipulated or fixed price. In a lump sum contract, the owner has essentially assigned all the
risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of
unforeseen contingencies. A supplier being contracted under a lump sum agreement will be responsible for
the proper job execution and will provide its own means and methods to complete the work. This type of
contract usually is developed by estimating labor costs, material costs, and adding a specific amount that
will cover contractors overhead and profit margin.
The amount of overhead calculated under a lump sum contract will vary from builder to builder, but it will be
based on their risk assessment study and labor expertise. However, estimating a very large overhead cost
can lead the contractor to present higher construction costs to the project owner. The expertise of the
contractor will determine how their estimated profit will actually be; furthermore, a poor executed and longdelayed job will raise your construction costs and eventually diminish the contractor's profit.
Lump Sum: When to Use It
A lump sum contract is a great contract agreement to be used if the requested work is welldefined and construction drawings are completed. The lump sum agreement will reduce owner risk, and the
contractor has greater control over profit expectations. It is also a preferred choice when stable soil
conditions, complete pre-construction studies and assessments are completed and the contractor has
analyzed those documents. The stipulated sum contract might contain, when agreed-upon parties, certain
unit prices for items with indefinite quantities and allowance to cover any unexpected condition. The time to
award this type of contract is also longer; however, it will minimize change orders during construction.
Lump Sum Contract Advantages
A lump sum contract offers the following advantages:

Low risk to owner.


'Fixed' construction cost.
Minimize change orders.
Owner supervision is reduced when compared to Time and Material Contract.
Contractor will try to complete the project faster.
Accepted widely as a contracting method.
Bidding analysis and selection process is relatively easily.
Contractor will maximize its production and performance.
Lump Sum Contract Disadvantages
This type of contracting has also limitations:

It presents higher risk to contractor.


Changes are difficult to quantify.
The Owner might reject change order requests.
The project needs to be designed completely before the commencement of activities.
The construction progress could take longer than other contracting alternatives.
Contractor will select its own means and methods.

Higher contract prices that could cover unforeseen conditions.


Lump Sum Critical Items
Lump sum contracts are a great tool for smaller jobs and quite simple projects. However, lump sum
contracts could eventually produce large dispute and claims that will arise from contract documents. The
most common arguing factors are:
1.
Unbalanced Bids
Some projects might require to produce an application for payment using unit quantities and unit prices.
Many contractors will produce an unbalanced bid by rising unit prices on items to be completed early
in the project, such as mobilization, insurances and general conditions, and lowering unit prices on items
needed in later stages.
2.
Change Orders
If the owner produces or receives a change order proposal from the contractor, the price quotation could be
possibly disputed. The Owner might appeal that the requested change was already covered under contract
provisions. It is important to prepare specific contract clauses specifying how change orders are going to be
managed and to what extent the contractor could claim delay damages.
3.
Design Changes
A contractor may suggest design changes based on their experience. Contract provisions should be
clear on how those changes will be addressed and how those costs will be divided or who will be
responsible for the economic impact of the proposed changes.
4.

Early Completion

Lump sum contracts might include an early completion compensation for the contractor. Early
completion might produce higher savings for the project owner; however, those clauses might be explicit in
the construction contract.

Time and Material: Time and Materials Contract


Things to know when using a Time and Materials Contract
Time and materials contracts are used when both parties agree to pay predetermined unit rates. Time and
materials contracts are used when it has been impossible presenting an accurate estimate or where the
schedule cannot be defined. This type of contract presents the highest risk for the owner and the most
secure way for a contractor. Time and materials contracts are the least desirable contract type for the federal
government.
Time and Materials Contracts Items
When using time and materials contracts, the following items could be negotiated:

1.
2.
3.

4.

Labor Rate- Specifying a fixed rate for all labor including administrative personnel. If you are using
T&M on large projects, be sure to offer discountedlabor rates to reduce total project cost.
Material Mark-Up- T&M contracts usually add between a 15 and 35 percent onto material prices.
Not-to-Exceed- The Time and Material not to exceed, is a contract in which the contractor can bill the
work being performed but there is a cap that could be used as the maximum amount being charged
by the contractor. This type of variation can be used to increase contractors efficiency and it assumes
the excessive costs. It also provides the owner with a cap that will guarantee that contractor will not
exceed from that cap.
Maximum Labor Hours- In addition to the not-to-exceed condition, time and material contracts, a
maximum number of labor hours could be set. When the contractors exceed a specified amount, those
additional hours shall not be billed to the other party. This avoids the less efficiency = more money
issue of time and materials contracts.

Time and Material Contracting


Some federal agencies use time and material contract, although not popular among governmental agencies.
Some of the agencies that use T&M Contracts are:

Defense Information Systems Agency (DISA)


Federal Transit Administration (FTA)
U.S. Department of Defense (DOD)
Time and material contracts in the federal government can be used once the contracting officer determines
that it is the most suitable contract that can be issued, and when the contract includes a not to exceed
conditions. The Federal Acquisition Regulations (FAR) explain that this demonstration may be made by
establishing that it is not possible at the time of placing the contract to estimate accurately the extent or
duration of the work or to anticipate costs with any reasonable degree of confidence (FAR 16.601(c)). When
using T&M, the government must also perform surveillance of contractor performance.
Time and Material Contracts Drawbacks

Time and material contracts has also some disadvantages such as:
Profit Limits- Some savvy customers will try to establish not to exceed conditions, will try to reduce

mark-up on materials and even negotiate reduced billable per hour rates.
Ignored Market Prices- Sometimes companies will set lower prices, based on their internal cost

structure, than actual market rates or even vice-versa.


Reduced Business- Customers are not used to work on time and material contract, so finding new

business opportunities, could be really challenging. Customers will likely preferred fixed price contracts.
Billing- Time and materials contracts should be structured in such way that the company will be able
to bill sufficient amount of money to cover fixed costs. When the billing hours are reduced, fixed costs
must also be reduced at the same rate as the billable hours.