All About Cost-Plus Contracts
All contractors (and people for that matter) want to get to paid. You put a great deal of work into the building process and you manage many, if not all aspects of your business. Getting paid is what keeps you going. For contractors, a critical portion of that is having the right contract. Understanding your contract is critical because it dictates payment methods and sets the tone for how a project will be carried out. As a matter of fact, working with a Nashville contractor lawyer to protects your interests is always a wise choice.
One such contract that presents numerous advantages to contractors is the cost-plus contract. The cost-plus contract is one in which many of the contractor’s costs during a project are covered. In this contractual arrangement, contractor costs include direct costs (labor, equipment, materials), indirect costs (overhead), and a fee. The fee is the contractor’s margin for the work being performed.
Advantages of Cost-Plus Contracts
Generally speaking, the cost-plus contract is more advantageous to the contractor than the owner. However, there are a few considerations in which we will discuss later in this article. Advantages include:
- Minimizes risk for contractors: Within reason, contractors can be assured that all expenses associated with the project will be covered. While they have to adhere to budgets and best practices, per their contract, they will get paid. This allows the contractor to focus on quality over cost-cutting.
- Good for projects without a clearly defined scope: By assuring the project costs will be covered, a cost-plus contract is good when the scope of work is still being determined. It allows work to start while the specific pieces of a job are still being defined.
Considerations for Cost-Plus Contracts
Cost-plus contracts are not a carte blanche. Here are a couple of items to consider in this arrangement:
- Higher level of scrutiny: Since costs are not predetermined, their validity must be tested. The project owner has a right to review all costs to ensure that they are in keeping with the scope of the project and not a product of contractor error. Good recordkeeping is vital in this arrangement.
- Provisions can be put into contracts to prevent cost overruns: To the earlier point, many cost-plus contracts avoid becoming a blank check by putting provisions in place that cap costs and fees.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.