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Monthly News Letter – July 2009
Contracts Part II - Cost Plus

This letter is the second in a four part series regarding construction contracts.

The Cost Plus contract is the most flexible and simple of all the contracts. Often, it is used when owners are anxious to get started and the drawings and or documents are not specific or even complete. It can save the owner money due to fewer drawings or documents and the owner is not paying for money added into a bid by the contractor for uncertainties. Unforeseen problems such as encountering rock can be handled much easier with a cost plus contract. The job progress can continue without any change orders and the owner still only pays the actual cost plus a percentage.

With a Cost Plus agreement, the owner is billed the contractors cost of all material, labor (not office personnel labor), subcontractors charges, permit fees, utilities, equipment rental whether rented or owned by the contractor, and insurances purchased specifically for that job, plus a percentage of the cost usually between 10% and 35% depending on several factors. In most cases the percentage fee would be 15% to 25%. Some of the factors determining the percentage to be added to the contractor’s cost are the contractor’s work load or need of business, the size of the project, anticipated time consumption or involvement, and the complexity of the project. This percentage to be paid is to cover the contractor’s overhead and profit.

The contractor should manage the project the same as he would in a stipulated sum agreement such as getting competitive prices for materials. I personally shop material list for the best pricing but also weigh in the past experience with material suppliers.
In most cases, the contractor would use his subcontractors from previous job relationships due to knowing their past performance but may want to get more than one quote just to satisfy himself the owner or his customer is getting the best deal for his money. Occasionally, contractors get discounts for building materials and allowances such as flooring, tile work, light fixtures, etc.. I usually keep any discount for building material due to complications when there are returns but give the owners all other discounts.

I have mentioned the advantages to a Cost Plus Contract but there are some disadvantages. The main disadvantage is the total cost of the project is not known until the project is complete. This can be a problem where there is a tight budget. The total cost can be addressed with a “detailed” estimate prepared by the contractor. With this estimate, the owner should be made aware of the allowances used in the estimate for such things as cabinetry and finished flooring etc. to be sure they are realistic. Some banks discourage cost plus contracts due to the lack of cost control.

A “Cost Plus Contract” is a very good agreement for a construction project and can make for a pleasurable building experience.

If you have construction related questions or issues, send me an email dscc@bresnan.net and I will do my best to address them.


David Simpson Construction LLC
3860 Avenue D
Billings, MT 59102
406-656-8143
www.davidsimpsonconstruction.com