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When speaking to contractors about cost plus construction we’ve often heard the concern that the transparent nature of cost plus construction and negotiated fee can increase overhead while reducing margin. The tradeoff should really be seen as slightly reduced profit for greatly increased predictability in profit. That being said, it’s very important in cost plus construction to make sure to capture every expense. That way you’re actually achieving the promise of a predictable profit.

When negotiating cost plus contracts it’s standard to include labor rates as an addendum to the contract. These rates should reflect the full cost of labor incurred by each employee or contractor you employ. This includes benefits, taxes, insurance and overhead incurred by employing people on site. Invoices for labor based on these pre-negotiated rates should be submitted to the project and reimbursed like any other expense. You’ll then pay your workers through your normal payroll system. These expenses typically do contribute to the subtotal on which your fee is based. This way your overhead doesn’t become a leaky bucket.

In some cases required insurance can be billed as a separate line item in the contract. Project based insurance is often priced as a percentage of the cost of construction and can be applied to the project budget and applied to each invoice just like your percentage fee. In most cases this will not contribute to the subtotal on which your fee is calculated.

Project expenses will be incurred in a variety of ways. In cost plus construction it is extremely important to capture all expenses and attribute them to projects for billing. This should be done in an automated way from banking and credit card records. Using Buildplus you immediately attribute all payments made from within the app to projects and budget scopes of work at time of payment. Cost plus construction requires you to rigorously document each expense to capture the full amount due to you both in terms of profit and reimbursable expenses.

Change orders in cost plus construction are a little less straightforward than in fixed fee contracts. When operating in a pure cost plus contract, where there is no GMP or contingency, change orders are really just increases to the cost of construction and as a result increase the contractor’s fee. When a GMP has been negotiated, it’s extremely important to track changes to the original scope of work, and make sure that any additional work is submitted and approved as a change. If a true change order is approved, this should be tracked outside of the GMP as it is work outside of the original scope the GMP was based on.

The biggest concern for clients in cost plus construction is often that it removes incentives for their general contractor to control the cost of construction. The first and most powerful line of defense here is the additional reporting and transparency required by cost plus construction. There is no "just trust me bro" in cost plus construction, and that solves a large portion of this problem. Improved reporting increases trust and enables clients to challenge wasteful spending. In addition, there are a number of tools unique to cost plus construction that can be employed to further control costs.

A control estimate is a fancy budget spreadsheet that you use to track the true cost of construction against the initial estimate or project budget. As you incur expenses you track those against the project budget developed in pre-construction. The control estimate can be an important, and in some cases contractually obligated, tool for communicating the cost of construction in real time. Buildplus automates control estimate reporting so that you and your client are always on the same page.

Cost plus contracts are written to accommodate change. That’s the whole purpose. But when we think about controlling cost, we want to make sure that this feature of cost plus contracts doesn’t become a back door to unchecked cost overruns. Contingency is a fancy word for "an extra pot of money we can use just in case." The trick is to define the maximum expected contingency up front, with provisions that define what kinds of approvals are needed. Contractor’s contingency can be drawn on by the contractor without approval and typically covers variability or errors that are uncovered during construction. Owner’s contingency needs to be drawn down with approval of the owner and can cover unanticipated changes to the specifications or project requirements.

A guaranteed maximum price is another tool that can protect a project owner from runaway construction costs. The guaranteed maximum price is calculated by adding all expected project costs including the estimated cost of construction, general conditions, builders fee with the project contingency. The guaranteed maximum price (GMP) is often negotiated towards the end of design development. If the GMP is negotiated earlier, the contingency will necessarily be larger to account for uncertainty in the final design.

Finally, shared savings incentives, for instance split 75% / 25% between the owner and builder respectively, can help incentivize the GC to save money during construction. The savings will be calculated based on the contingency negotiated at the beginning of the project.