A cost-plus-percentage of cost contract is a type of agreement that is commonly used in the construction industry. This type of contract is designed to ensure that contractors are compensated for their work and materials in a fair and transparent way. In this article, we will discuss the ins and outs of cost-plus-percentage of cost contracts, how they work, and some of the advantages and disadvantages of using this type of contract.

What is a Cost-Plus-Percentage of Cost Contract?

A cost-plus-percentage of cost contract is a type of contract used in the construction industry where the contractor is paid a percentage of the cost of the materials and labor used for the project, plus a fee for their services. The percentage is typically negotiated beforehand, and it can vary depending on the size and complexity of the project, as well as the contractor`s experience and reputation.

How Does a Cost-Plus-Percentage of Cost Contract Work?

In a cost-plus-percentage of cost contract, the contractor is responsible for procuring all the materials and labor needed for the project. They receive payment for these materials and labor based on the actual cost incurred, plus a percentage of that cost.

For example, let`s say a contractor is hired to build a new house for $500,000. The percentage agreed upon in the contract is 10%. The contractor then proceeds to purchase materials and hire labor, which costs a total of $400,000. The contractor would then receive $40,000 (10% of $400,000) plus their fee for services.

Advantages of a Cost-Plus-Percentage of Cost Contract

One advantage of a cost-plus-percentage of cost contract is that it provides transparency and accountability. Since the contractor is paid for the actual cost incurred, there is less opportunity for disputes over payment and cost overruns.

Another advantage of this type of contract is that it provides a level of flexibility. If changes need to be made to the project mid-way, the cost-plus-percentage of cost contract allows for adjustments to be made based on the actual cost incurred, rather than needing to renegotiate the entire contract.

Disadvantages of a Cost-Plus-Percentage of Cost Contract

One disadvantage of a cost-plus-percentage of cost contract is that it can be more expensive than other types of contracts. Since the contractor is compensated based on the actual cost incurred, there is less incentive for the contractor to stay within budget or find cost-saving measures.

Another disadvantage is that the risk is shifted to the owner. If cost overruns occur, the owner is responsible for paying the additional costs.

Conclusion

A cost-plus-percentage of cost contract is a popular option for construction projects because it provides transparency and flexibility. However, it can be more expensive and may shift the risk to the owner. Before entering into any contract, it`s important to carefully consider the advantages and disadvantages to determine whether it is the right option for your particular project.