Cost-Plus Contracts

Although many contractors appear to believe that their best bet is a cost plus contract, that thinking may be short-sighted.

Legally the cost-plus contractor may have a greater burden than if his contract were a fixed price. This is because of two considerations:

( 1 ) the cost-plus contract itself must be very carefully drafted and

(2) the cost plus contractor has responsibilities he would not otherwise have under a fixed-price contract.

In drafting the cost-plus contract great care must be exercised in spelling out the "costs" to be reimbursed and upon which the contractor's fee is to be determined. The contract should define costs so that there is no question of what may be covered. Items such as equipment rentals, tools, depreciation or other compensation for use of contractor-owned equipment; site, office or administrative overhead items and numerous others must be considered. A good starting place for careful drafting may be the American Institute of Architects cost-plus contract form, carefully read.

Naturally, the cost-plus contractor cannot proceed to incur costs without regard to the amount he is spending. Implicit in his contract is an obligation on his part to keep costs reasonable. A good rule of thumb would require the contractor to negotiate subcontracts and other items as though he was spending his own money rather than the owner's. This is even more critical when the contract does not contain a guaranteed maximum price placing a limitation upon the owner's total dollar cost. The cost-plus contractor must maintain complete records sufficient to establish, if necessary, the actual costs he has expended as well as their reasonableness. Courts or arbitrators will generally not accept unsubstantiated numbers. Instead, they do and should require the cost-plus contractor to establish both the amount of costs he has incurred and their reasonableness.

Surely, the cost-plus contractor cannot expect to be reimbursed for unnecessary costs he has incurred because of his own bad management, inefficiency or fault.

Similarly, the cost-plus contractor cannot be expected to recover costs incurred in correcting defective work or work not conforming to applicable plans and specifications.

If the cost-plus contractor is aware of the owner's budget or financing limitations, he may encounter problems unless he gives the owner timely notice of potential cost overruns.

In the event that a dispute between the contractor and owner results in litigation or arbitration, it will be necessary for the cost-plus contractor to be able to fully document not only his actual costs but his efforts to complete the construction at a reasonable cost to the owner.

At first blush a cost-plus contract may appeal to the contractor, but he should nevertheless familiarize himself with the pitfalls involved, his responsibilities and the additional burden which may be placed upon him. That burden results from the fact that the "plus" in his arrangement is his compensation for both competent work and sound management of the owner's dollars.