Cost-Plus Contract: How to Use One

Cost-Plus Contract: How to Use One

Contracts specify the terms of the agreement between an employer and a contractor. There are many different types of contracts, each with its own benefits. A cost-plus contract is an agreement between an owner and a contractor, in which the contractor covers the expenses of the project and is reimbursed by the owner upon its conclusion. When should one be used? Cost-plus contracts are the best choice when quality is more important than time spent or costs.

The construction industry commonly uses cost-plus contracts for the bidding process, while the engineering industry comes in second. Experts in these fields are hired to do something their employer doesn't have the skillset to do.
A cost-plus contract outlines how both direct and indirect costs will be covered and how they will be reimbursed to the contractor. It includes an additional, predetermined amount to be paid to the contractor on top of expenses, which can be a flat fee, a fixed rate (determined by the cost of labor, supplies, etc.) or a combination of the two. Cost-plus contracts are most successful when they are specific, and outline things like how expenses should be documented by contractors and how disagreements between contractor and employer should be handled. Three key parts of a Cost-Plus Contract should be made up of three core components: direct costs, indirect costs and a fee. Variations of a cost-plus Contract include an incentive fee, award fee, and built-in fees.