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Cost Plus Contracts

April 25, 2018

Cost plus contracts are becoming more popular among construction companies. But what is a cost plus contract? Pretty simple, it s time and materials type contract. The contractor will bill for actual cost of labor, subs and materials and any other job related costs. The contractor then adds a fee for company overhead and profit. This can a be a percentage or a fixed fee, Percentages can range any from 15% to 50% depending upon job size, smaller jobs being on the higher end. In fact this has become our go to contract for remodeling work.

 

Actual cost of labor, what is that? Depends who you ask! Many contractors don't understand their costs of a employee. This cost should include the cost of the following:wages, company paid taxes, workers comp, insurance, healthcare, vacation, sick time, 401k, fringe benefits and so on and so on. This amounts will vary greatly among different companies.

 

Job related costs are costs incurred while working on a project. These can include rentals, equipment charges, consumables, and really anything else used directly or indirectly on a given project. 

 

Lets talk about some of the benefits of a cost plus. It can often save the customer money and also ensures the contractor will not lose money on a project. The customer saves money from the lack of "padding" of bid prices, Padding is when you add extra labor and materials costs to cover time delays or materials overages. This can range from 10% to as much as 30% of the bid price. You only pay for the work being done and materials being used, nothing extra. Why should you care if your contractor is losing money? Simple, you want to work with a happy contractor! Money and disagreements can sour a contractor/customer relationships and in the long run can have a negative affect on a project. We also find many people don't have a design or plans for a project and often leads as to design as we go. Its impossible for any one to provide a firm bid with out knowing what your doing! Its a open books method, you get to see what things really cost! This is my favorite part! Often people don't understand just how expensive the construction industry is. Between labor, subcontractors and materials it is a very expensive industry. And one more thing to keep in mind about fixed bid contracts, they really don't exist! Almost every project will have a change order making it a not so fixed bid at some point. 

 

Some downsides of cost plus, or what some say are down sides. Don't have a firm end cost. See above for why that doesn't matter. Contractor can slow work down and drive up costs to make more money. Yes of course they can but a honest contractor doesn't do that! If you cant trust your contractor then you shouldn't be working with that company/person. Can create issues with what is or isn't to be reimbursed to the contractor. can be true but a well written contract will have all of those details worked out in print. Many contractors hate them..Why? Because it shows the customer all their costs and markup!

 

In the end this can be a cost saving contract for customers along as they trust and can work with their contractor closely. 

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