Deepti Dighe (UIN: 677511295)

Daniel Tapia (UIN: 654707009) 

Agastya Narumanchi (UIN: 675492171)

Group Assignment 2

Q1) Define the differences between a Cost-Plus contract and a Time-and-Materials contract.

Ans)
Cost-Plus contract
In a cost-plus contract, one party agrees to reimburse the contracting party for expenses plus a
certain profit proportional to the total value of the contract. Cost-plus contracts are often used in
construction when the budget is tight or when there is a high probability that the actual costs will
be lower than expected. Contractors must provide evidence of all related expenses, including
direct and indirect costs.
The advantages and disadvantages of using these types of contracts are as follows:

Pros:
They eliminate some risk for the contractor. They help shift the focus from the overall cost to the
quality of the work done. They cover all the expenses related to the project, so there are no
surprises.
Cons:
They may leave the final cost up in the air since they can't be predetermined.
They may lead to a longer timeline for the project.
Might lead to disputes when trying to recover construction-related expenses
Requires additional resources to reproduce and justify all related costs

Time and Material Contract

The contractor might also include a maximum price for the project commonly called a “not-to-
exceed” clause — as a guarantee to protect the client against runaway costs.
Time and materials contracts are best when the scope of the job or its duration cannot be
determined before work begins, as is sometimes the case in construction projects. When
renovating an old building, for example, removing walls may uncover rot or other damage not
visible before the job started. Another situation ripe for a time and materials contract is when the
materials prices are likely to change. Perhaps lumber costs or gas prices are predicted to rise
significantly over the duration of the job.
Pros:
Simple
Ensures contractor will earn a profit
Easy to adjust to changes
Easy to add or remove resources when needs change
Cons:
The client may run out of money before the end of the project.
Without a no-return clause, workers have no incentive to work efficiently.
Rising labor prices could eat into profit. Tracking costs is extra work
 Deepti Dighe (UIN: 677511295)
Daniel Tapia (UIN: 654707009) 
Agastya Narumanchi (UIN: 675492171)

Q2) Identify a situation where a Cost Plus contract would be most appropriate and why.

Ans)
A cost-plus contract might be used when the budget is being restricted or when there is a high
probability that actual costs might be reduced. This type of contract is preferred when there is not
enough data to perform a detailed estimate of the work or when the design is not completed. It is
preferred by government agencies as they can select the contractor based on his qualifications
rather than the lowest bidder.
Cost-plus is widely used to perform research and development works because the risk can be
controlled by the contracting officer. It would be beneficial to enter into a cost-plus contract
where there is mutual trust between owners and builders who are able to have meticulous record
keeping.
 Deepti Dighe (UIN: 677511295)
Daniel Tapia (UIN: 654707009) 
Agastya Narumanchi (UIN: 675492171)

Q3) Identify a situation where a Time-and-Materials contract would be most appropriate and
why.
Ans)
The client agrees to pay for the actual scope of work. This is based on both the hourly rate of
labor and how many hours were worked, the cost of materials, and how many materials were
used.
1. Unpredictable scenarios
Costs are predictable when you know the requirements, timeframes, and exact specifications of a
job before the job has begun. However, if a client doesn’t have a clear vision of what they want,
there’s no telling what the final product will involve.
Unpredictability can also be associated with timelines. If there’s no set timeline or timelines are
likely to change, that needs to be accounted for.
2. When both parties can agree
These contracts do pose a higher risk for the owner while securing your profit. Yet, when a client
can’t define the scope of work, a time and materials contract ensure that your business can be
profitable on the project.
3. When there’s a need for flexibility
When working on a long-term project with dynamic requirements, a time and material contract
gives you flexibility. If timelines are going to change, we need the flexibility to account for
longer work hours and overtime.
4. When you’re new to the industry
When you’re a new contractor, you may be unaware of hidden costs, expenses, and overhead that
you need to cover. When you lack a system for accurately estimating costs, you can’t provide an
accurate quote. You also run the risk of inaccurately forecasting construction projects and what a
project takes to complete. This can lead to overestimating. Using a time and materials contract
can help you gain expertise in estimating.