Under its own agreement, Forrest Construction was required to keep detailed accounting and catch-up documents for all expenses and to submit applications for the project. However, when the owner requested the project`s accounting documents, the contractor was only able to present a “two-metre-thick pile” of disorganized receipts. The Court found this type of recording unacceptable when it said, “In every cost-plus contract, there is an implicit agreement between the parties that the costs must be reasonable and reasonable.” The Court held that the contractor is required to break down each individual expense he spends on the work, and if the owner denies being indebted to the contractor, the contractor is responsible for proving each element related to the contractor. Requires additional resources to replicate and justify all associated costs With a cost-plus contract, the contractor receives all the expenses of a project, plus an agreed profit, generally defined as a percentage of the total cost of the contract, or a fixed fee. If compiling an estimate for a job proves difficult, a cost-plus contract can help. Since fees are reimbursed when work arrives, a contractor doesn`t have to worry about an inaccurate or erroneous estimate that ruins his or her margin of employment – he`s already installed! The contractor must provide and justify documentation relating to all employment-related costs. Depending on the terms of the agreement, the contractor may “repay” certain costs, particularly salaries, to cover overhead and unforeseen expenses. Suppose ABC Construction Corp. has a contract to build a $20 million office building, and the agreement stipulates that the cost must not exceed $22 million. ABC`s profit was agreed with 15% of the total contract price of $3 million. In addition, ABC Construction may receive an incentive fee if the project is completed within nine months. Unlike a fixed-rate construction contract, a cost-plus construction contract is a contract by which the owner pays the owner the actual cost of materials and work, plus an additional negotiated tax or a percentage of that amount.
The cost-plus contract is probably the most common contract in the construction sector. The additional tax or fixed percentage is the contractor`s benefit. This contract defers to the owner all the risks inherent in a project and all the benefits of unforeseen changes in the cost of materials, the cost of labour and all the risks and benefits of the project`s effectiveness or absence from the contractor. Due to the nature and risk inherent in the cost-plus contract, there are certain obligations inherent in the contract or owner. The contractor is required to present each individual expense of each expense made during the project, since it is implicitly agreed between the parties that the costs are reasonable. Cost-plus agreements are beneficial when projects are not yet fully defined and can eliminate risks to the contractor. Some other benefits are: Direct costs: This includes all materials, supplies, labour, equipment, rentals, consultants and all other subcontractors. Cost-plus contracts are also used in research and development (research and development) activities in which a larger company can outsource research and development activities to a small company, for example. B a large pharmaceutical company that goes to the laboratory of a small biotechnology company. The U.S. government also uses cost-plus contracts with military defense companies that develop new technologies for national defense.
Another advantage of this type of contract is that it can be used to set a cap or cap on the amount of money a contractor can/will spend on a particular project.