AEC definitions
A cost-plus contract pays the contractor the actual, allowable cost of the work plus a fee. The fee can be a percentage of cost or a fixed amount. With a guaranteed maximum price, the owner pays cost-plus only up to the cap. Without a cap, the owner carries the cost risk.
Definition
Allowable cost has to be defined: labor, material, subcontract, equipment, and the list of what is in the fee instead, such as home-office overhead. Open-book accounting is the point. The owner may audit. A percentage fee rises when costs rise, which is a weak incentive to save. A fixed fee does not. Cost-plus is used when the scope is not defined enough for a lump sum, including early construction and some renovations. It is not a reason to skip a scope of work. The fee is calculated on whatever the contract says is cost.
In depth
The agreement lists reimbursable costs and lists costs the fee includes. A superintendent's truck, a project executive, and a correction of defective work are frequent arguments. Write them down.
Subcontractor costs are reimbursable when the subcontract was let under the rules the owner set, including any bidding requirements.
A percentage fee pays the contractor more when the job costs more. Owners who want a shared interest in savings use a fixed fee, sometimes with a shared-savings clause under a GMP.
Fee on fee, such as charging the fee on insurance that already includes overhead, should be explicit if it exists at all.
Cost-plus without a GMP is open-ended. Cost-plus with a GMP is still paid on cost, but the contractor carries the overrun past the maximum, subject to owner changes. Do not call a pure cost-plus job a GMP.
Contingency inside the GMP is not the fee. Report them separately.
The owner needs timely cost reports, not a box of receipts at the end. The contract should say how often, what backup, and how long the owner has to question a cost.
A cost the contract does not allow is not saved by the fact that it was spent.
Early packages and unknown renovations fit cost-plus. When the documents firm up, parties sometimes convert to a GMP or a lump sum.
The conversion is an amendment, with a new risk deal, not a handshake.
Examples
A renovation with unknown wall conditions is let as cost plus a fixed fee. Allowable labor rates are an exhibit.
The same project later converts to a GMP. Costs to date are reconciled. The cap applies to the remaining work plus those costs.
A percentage-fee contract charges fee on an owner-added change. The agreement said the fee applies to changes. The invoice follows it.
FAQ
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