A cost plus contract is a type of contract commonly used in the construction industry. It is a contract where the contractor is paid for the cost of the project, plus a percentage fee for managing and completing the work. This type of contract is often used when the project is complex or when the exact scope of work is unclear.
While cost plus contracts can be advantageous for the contractor, they also have some significant disadvantages. In this article, we will discuss what a cost plus contract is, and its disadvantages.
What is a Cost Plus Contract?
A cost plus contract is a type of contract in which the contractor is paid for the cost of the project plus a percentage fee. The cost of the project includes all materials, labor, and other expenses related to the project. The contractor is also paid a percentage fee for managing and completing the work. This fee is typically between 5% and 15% of the total cost of the project.
Cost plus contracts are often used in the construction industry, especially for complex projects or projects where the scope of work is unclear. In a cost plus contract, the contractor is responsible for managing the project and ensuring that it is completed within budget and on time.
Disadvantages of Cost Plus Contracts
While cost plus contracts can be advantageous for contractors, they also have some significant disadvantages. Here are a few of the most common disadvantages of cost plus contracts:
1. No incentive to control costs
One of the biggest disadvantages of cost plus contracts is that they do not provide any incentive for the contractor to control costs. In a cost plus contract, the contractor is paid for all of the costs of the project, including materials, labor, and other expenses. This means that there is no incentive for the contractor to find ways to reduce costs or to be more efficient.
2. No fixed price
Another disadvantage of cost plus contracts is that they do not provide a fixed price for the project. Because the contractor is paid for the cost of the project plus a percentage fee, the total cost of the project can vary depending on how much time and materials are required. This can make it difficult for the owner of the project to budget and plan for the project.
3. Risk of overcharging
Another disadvantage of cost plus contracts is that there is a risk of overcharging by the contractor. Because the contractor is paid for all of the costs of the project, there is a risk that they will overcharge for materials, labor, or other expenses. This can lead to a higher total cost for the project than originally anticipated.
4. Lack of transparency
Finally, cost plus contracts can lack transparency. Because the contractor is paid for all of the costs of the project, it can be difficult for the owner of the project to know exactly how much is being spent on materials, labor, and other expenses. This lack of transparency can make it difficult for the owner to hold the contractor accountable for the total cost of the project.
Conclusion
In conclusion, a cost plus contract is a type of contract that is commonly used in the construction industry. While cost plus contracts can be advantageous for contractors, they also have some significant disadvantages, including no incentive to control costs, no fixed price for the project, a risk of overcharging, and a lack of transparency. Before entering into a cost plus contract, it is important to carefully consider these disadvantages and to weigh them against the potential benefits of this type of contract.