COST PLUS AGREEMENT
In a Cost Plus Agreement the Contractor is reimbursed for his actual expenses for the project, plus an agreed upon fee or percentage fee. It is often used in situations where a Lump Sum price is not discernible, or where schedule is more important than other factors. An example of a situation where a Cost Plus Agreement would be appropriate is one in which an Owner requests remodeling services to an existing building, but some or most of the physical building details are hidden by the buildings surfaces or are underground. Another situation could be where an Owner wishes to occupy a building in a very short time frame and cannot wait for the Contractor to obtain multiple bids. It is crucial that the Owner and the Contractor enter into a written agreement clarifying what types of expenses are reimbursible and what types of expenses are non-reimbursible. Most Cost Plus Agreements refer to some type of control estimate or Target Price to assist parties in evaluating the progress of the work and budget. It is most critical to maintain open and continuous communication between the Owner and the Contractor to insure that the Owner is aware of changes to the control estimate as often as is reasonably possible, in order to avoid budgetary misunderstandings at later stages. Cost Plus Agreements may or may not be subject to guaranteed maximum price (GMP) clauses, depending upon what the parties agree to and memorialize in a written agreement.
Contractor Risks: The Owner misunderstands the impact of changing prices during the construction period, resulting in disappointment or hard feelings.
Owner Risks: Expected budget may escalate dramatically if hidden conditions demand costly changes in the work. Note however that this risk is also possible under various project delivery contract arrangements.