What are Cost-Plus Contracts?
We are often asked the difference between a Cost-Plus contract and a Lump-Sum contract. This short article will define these two contractual delivery methods and offer some advantages of each.
Cost-plus as a contractual delivery method defines the work of the agreement and defines the overhead and profit required to put this work in place. The overhead or General Conditions are often tied to the duration of the work. The profit or fee is often defined as a percentage of the total. In this type of contract arrangement, the actual scope of the work can vary and the overhead and fee will therefore adjust and factor of the cost of work. On most Cost-Plus contracts a contingency is utilized to account for unknowns, and a Guaranteed Maximum Price (GMP) is often employed to cap the contract total.
Lump Sum contracts (also called stipulated sum or fixed price contracts) are based upon a specific scope of work. This scope of work is typically defined by a set of drawings and specifications. The contractor provides one fixed price to complete the scope of work as detailed by the drawings and specifications. When there are changes to what is defined as the work, the lump sum price is changed by a contract change order.
Cost Plus contracts are most often used when the scope of work is not fully defined at the time a contract is executed. When the contractor is brought on board during the design phase to assist with value-based design decisions, a Cost Plus contract is useful.
Lump Sum contracts are most often used when the scope of work is clearly defined and design decisions have already been made.
While we routinely operate under both contract types, we prefer the Cost-Plus arrangement due to the flexibility it offers for value-engineering and using budget dollars for their greatest impact.