There are risks and benefits associated with any contract. The cost-plus agreement can be full of challenges for any owner or contractor. However, if the initial attention is given to drafting contracts, the cost-plus agreement can be an excellent contractual instrument for both parties. The key to the cost-plus agreement is the consideration of the terms of the agreement when negotiating, including the addition of a GMP, detailed audit arrangements and forum selection. Another problem could be the consideration of indirect costs. Contractors must turn on the lights, pay the rent and cover all possible administrative costs. These are not fees that an owner is usually happy to cover. It is therefore important to ensure that the “plus” is sufficient to cover the indirect costs. A cost-plus contract has advantages and disadvantages for the contractor and the project owner. The benefits of a cost-plus contract are: although there is no industrial standard, the “plus” part of Cost Plus contracts is generally between 10 and 20% of the total project cost. Another option for the contractor and the owner to protect themselves is to negotiate internal provisions for consideration for inclusion in the contract before work begins. At Forrest Construction, the parties ensured that the contractor was subject to an accounting of his expenses. However, they did not contain provisions that would have assisted both the contractor and the owner, defining a defined scope and clear expectations as to what the contractor should establish exactly, the methodology of how the accounting should have been performed, and the timing and frequency of the owner`s audits.
A carefully crafted audit rule may have helped in this area. Direct costs: This includes all materials, supplies, labour, equipment, rentals, consultants and all other subcontractors. A cost-plus contract is an agreement to reimburse the costs incurred as well as a given profit, usually indicated as a percentage of the total contract price. This type of contract is mainly used in the construction sector, where the buyer assumes some of the risk, but also offers a degree of flexibility for the contractor. In this case, the contracting party expects the contractor to meet its commitments and commits to paying an additional profit to enable the contractor to make additional profits once completed.