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Cost-Plus Contracts

‘Be wary of cost-plus contracts. The cost-plus form of contract has its own pitfalls and generally should be used only in unusual or specific circumstances. For example, it can be useful in a renovation project where it is impossible to determine the extent of work that must be undertaken before the work commences.’

ACUMEN, Cost Plus Contracts.1

The above warning, along with others in the Acumen note, are to be heeded, particularly those relating to illegal use of costplus contracts in the domestic building area. A disproportionate number of contract disputes occur when cost-plus is used – the warnings are very clear.

The use of cost-plus is longstanding; it is the traditional alternative to a fixed lump sum contract. Instead of a ‘fixed price’, the builder is contracted on the basis of ‘cost’ of materials and labour, ‘plus’ a profit margin. It is an extremely flexible contracting system and is well suited to instances where speed of engagement, speed of commencement on site, and flexibility of design and detail during the contract is required.

Throughout the past 22 years, Six Degrees Architects has used cost-plus over a variety of projects, usually commercial or hospitality, with a value up to $2.5 million. Many of our most resolved and interesting projects have benefited from the flexible nature of the contract and the ability to design and detail on site with the builder, rather than resolve every detail on paper.

La Vita Buona by Six Degrees, administered with a Cost Plus Contract.

photographer: Patrick Rodriguez

Newmarket Hotel by Six Degrees, administered with a Cost Plus Contract.

photograph: Greg Elms

Newmarket Hotel by Six Degrees, administered with a Cost Plus Contract.

photograph: Greg Elms

La Vita Buona by Six Degrees, administered with a Cost Plus Contract.

photographer: Patrick Rodriguez

Cost-plus is not for those who want surety of time or price. It is for those who live in a world of calculated risk, and in general this means the world of commerce or institutions with a high level of commercial risk understanding.

Cost-plus is often chosen by entrepreneurs who can never bring themselves to ‘pay retail’, and clients to whom the speed of design and construction, and the acceleration of end date are more important financially than the construction cost. Cost-plus offers flexibility and the ability to take an active role in the construction process.

There is no fixed price, you simply begin building without knowing how much it will all cost to complete.

To use or not to use the Cost-Plus Contract – Costs vs Potential Savings

COSTS OF COST-PLUS POTENTIAL SAVINGS OF COST-PLUS NOT INCLUDED
CONSTRUCTION
  • Labour
  • Materials
  • Insurance
  • Authority fees
  • Preliminaries
  • Waste
  • Equipment hire, cranes
  • Administration time
  • Site supervision time
  • Site amenities
  • Profit on all of the above
  • Coffees & lunch
  • Builder’s fixed costs eg office costs and yearly insurance
  • Consultants
TIME
  • No waiting for full documentation
  • No tender period
  • No tender negotiation
  • No waiting for contractor to be
  • ready to start on site
  • No covering of lump sum
RENT/HOLD COST
  • Client can save on sunk lease costs by trading earlier
STAFF HOLDING COSTS
  • Client can save holding staff for an extended period
TRADING ADVANTAGE
  • Profit client can make by trading earlier
CONSTRUCTION
1. COSTS OF COST-PLUS

  • No waiting for full documentation
  • No tender period
  • No tender negotiation
  • No waiting for contractor to be
  • ready to start on site
  • No covering of lump sum

2. POTENTIAL SAVINGS OF COST-PLUS

3. NOT INCLUDED

  • Coffees & lunch
  • Builder’s fixed costs eg office costs and yearly insurance
  • Consultants

 

TIME
1. COSTS OF COST-PLUS

2. POTENTIAL SAVINGS OF COST-PLUS

  • No waiting for full documentation
  • No tender period
  • No tender negotiation
  • No waiting for contractor to be
  • ready to start on site
  • No covering of lump sum

3. NOT INCLUDED

RENT/HOLD COST
1. COSTS OF COST-PLUS

2. POTENTIAL SAVINGS OF COST-PLUS

  • Client can save on sunk lease costs by trading earlier

3. NOT INCLUDED

STAFF HOLDING COSTS
1. COSTS OF COST-PLUS

2. POTENTIAL SAVINGS OF COST-PLUS

  • Client can save holding staff for an extended period

3. NOT INCLUDED

TRADING ADVANTAGE
1. COSTS OF COST-PLUS

2. POTENTIAL SAVINGS OF COST-PLUS

  • Profit client can make by trading earlier

3. NOT INCLUDED

The point is there are many economic levers for the client in commercial projects, separate to the construction costs, which are very time sensitive. Cost-plus may be more expensive on paper, but the other time and quality benefits can offset this greater expense. Cost-plus may well be better than traditional lump sum contract (although it can also cost more, only time will tell).

 

FOOTNOTES

  1. [Oznline] Accessed October 2015., https://acumen.architecture.com.au/apps/notes/view/142 [Sep 2015]