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Understanding the Benefits and Challenges of a Cost Plus Building Contract

A cost plus building contract is a construction agreement where the homeowner agrees to reimburse the building contractor for the actual costs of construction plus a predetermined fee or percentage of the actual costs for profit and overhead. Unlike fixed price contracts, where the project’s total cost is predetermined, cost plus contracts provide flexibility, especially in complex projects where costs are difficult to estimate accurately beforehand. Cost plus building contracts have been around for hundreds of years. Most folks would agree that this is the OG method for contracting for construction work. Now that you hopefully understand what it is, here’s what we will discuss in the rest of this blog post.



cost plus building contract

Advantages of Using a Cost Plus Building Contract

Since historically the cost plus building contract was the method used for many, many years, there must be some significant advantages to the homeowner. Lets review them.

  • Transparency: One of the significant advantages of a cost plus contract is transparency. Homeowners have access to detailed costs, including the actual quotes and invoices if desired. There is also clarity on the builder’s overhead and profit costs. This ensures a clear understanding of where their money is being spent.

  • Flexibility: While these contracts will still have construction plans and detail specifications, they can allow for easier changes and adjustments to the project scope and design without extensive contract modifications, since cost component of the change is predetermined by the cost plus structure.

  • Accelerated Project Start: Cost plus contracts do not require a lengthy pre-construction phase where all components of the project are quoted in advance. This can be particularly beneficial for urgent or time-sensitive projects.

  • Lower Project Cost: Since builders no longer are bearing the responsibility of potential cost overruns, budget estimates within fixed fee contracts for contingency that may often be only partially used, are no longer needed. The resulting savings go to the homeowner, not the builder.


Challenges and Considerations of Using a Cost Plus Building Contract

With so many clear advantages to a cost plus contract, why have fixed fee contracts been growing in popularity over the years. There must be some challenges and considerations with cost plus. Lets review those.

  • Cost Control: While flexibility is an advantage, it can also be a challenge. Homeowners must trust the contractor’s ability to control costs effectively while the homeowner needs to manage their own risk of scope creep. Transparent communication and multiple bids for materials and labor can assist with the costs the contractor obtains. Predefining scope and sticking to specifications on the homeowner’s part is the best way to manage scope creep.

  • Documentation and Record-Keeping: Comprehensive documentation of all costs, expenses and charges is vital in cost plus contracts. Both parties must maintain records to ensure transparency and prevent disagreements and billing issues. Invoicing and reconciliation activities are much more complicated and time consuming.

  • Risk Allocation: The homeowner assumes all the risk on a cost plus contract. If the actual costs exceed the estimates, the homeowner is responsible for the overage. If there are mistakes or errors that require additional repairs and costs, the homeowner is responsible for the overage. This shifts the cost risk to the homeowner.

  • Misaligned Incentives: Given the nature of the cost plus arrangement, the contractor actually makes more when there are higher costs. Clearly that is the opposite incentive the homeowner wants to give.

  • Non-Binding Estimate: Unlike a Fixed Fee Contract, the estimate is completely non-binding. The only thing that matters are the actual costs. It is not unusual for a contractor to low ball their estimate to get the project, since they know this.

  • Call Backs & Warranty Claims: After the project is complete, if and when problems arise, will the contractor charge you to come back and make things right? It’s often unclear on a cost plus building contract.


Best Practice for Cost Plus Building Contracts

Like all construction contracts, there are some best practices that you should consider to minimize the challenges and highlight the advantages of a cost plus building contract.

  • Set & Keep Clear Project Scope: Even though a cost plus contract offers flexibility, have a well-defined project scope is crucial. Selecting finishes during pre-construction and then sticking to your specifications and selections to manage scope creep is a best practice for all construction contracts, but especially cost plus.

  • Regular Communication: Open and regular communication between the homeowner and contractor is fundamental. Scheduled weekly meetings to walk the project site and discuss progress to date and scheduled ensures both parties are aware of any potential issues.

  • Detailed Quotes and Cost Breakdown: Contractors should provide clients with detailed quotes and actual costs. With 30+ vendors involved, most but not all areas should receive at least 2 quotes. The homeowner and builder must communicate which areas will receive bids and why bids are selected, in order to minimize miscommunication and maintain trust.

  • Change Order Process: Establishing a clear process for change orders is essential regardless that the cost plus arrangement may specify how costs are handled. Changes in scope should be documented, agreed upon by both parties and incorporated into the contract to prevent disputes.

  • Experienced Project Management: Employing experienced project managers who can effectively control costs, manage resources, and navigate potential challenges is crucial to minimize mistakes that will cost you.


cost plus home

What Do Builders Charge for a Cost Plus Building Contract

When we have a conversation about cost plus building contracts, most homeowners focus very quickly on the amount builders charge. Since all of the detail material and labor line items are broken down into smaller totals, it’s not surprising to see this significant builder cost and be shocked by it. Most builders represent their cost plus number as a percentage of actual costs and it to simplify matters it is normally broken in two components – Overhead and Profit. The industry average for builder overhead ranges from 8-12%, while profit has a similar range 8-12%. So to answer the question, what do builders charge for a cost plus building contract? In our experience it ranges from 15-25%. We realize this is a broad range. As you consider this range, keep in mind that some builders that use cost plus building contracts will pull some items out of their overhead and insert them as project costs. Examples of this include project management, insurance, vehicle/travel expense, etc. While some can be true project specific expenses, others may not.


Where Can I Get a Cost Plus Building Contract Template

The American Institute of Architects (AIA) offers many construction contract templates. Form A103 is a sample cost plus contract that they offer. It provides the basic structure of a cost plus construction contract. Most builders should be very familiar with it. Similarly, most lenders will require a contract like this that they are familiar with. The template includes fields that specify reimbursable costs and the contractor’s fee will be calculated. There are standard sections for payments, dispute resolution, and more. This is not state specific, so we highly recommend that you consult with a construction law attorney before using this template. It may be a great starting point, but it is only a sample that will need to be tailored for your specific project and state.


Wrap Up

Cost plus building contracts offer a flexible and transparent approach to construction projects, providing several advantages and challenges. By adhering to best practices, many of these challenges can be mitigated. Ultimately, a well-executed cost plus building contract can lead to successful, high-quality projects. All the best with your custom home project!



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“I have known Jon for many years. He and his team at Owners’ Ace are an invaluable resource to anyone looking to design and build a custom home. Having their assistance makes a complex process so much easier and successful. I recommend Owners’ Ace to my clients and to anyone looking to build their dream home.”

BG Holmberg, Top Custom Home Realtor in Tampa Bay Area

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