Cost Plus Percentage Contract

A cost plus percentage contract is a type of construction contract in which the contractor is paid for the actual cost of construction plus a certain percentage of profit. In this type of contract, the contractor is reimbursed for all expenses incurred during the construction process, including labor, materials, equipment, and subcontractor fees. Additionally, the contractor is paid a percentage of the total cost of construction as profit.

Advantages

1. Transparency: Cost plus percentage contracts are highly transparent, as all costs and expenses are clearly documented and accounted for.

2. Flexibility: This type of contract allows for greater flexibility in terms of changes to the project scope, as the contractor is reimbursed for actual costs and can adjust the project as needed.

3. Incentivizes efficient work: The contractor has an incentive to work efficiently and minimize costs, as their profit is based on a percentage of the total cost of construction.

Disadvantages

1. No fixed cost: Since the total cost of construction is not fixed, it can be difficult for the owner to budget and plan for the project.

2. Risk of overcharging: There is a risk that the contractor may overcharge for expenses or inflate costs in order to increase their profit margin.

3. Lack of predictability: Since the final cost of the project is uncertain, it can be difficult to predict the final outcome of the project in terms of time and cost.

Conclusion

Overall, cost plus percentage contracts can be a beneficial option for construction projects in which there is a high degree of uncertainty or flexibility in the project scope. However, it is important for owners to carefully monitor costs and ensure that the contractor is working efficiently and transparently.