Cost-plus contracts: Considerations

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What is a cost-plus contract?

Under a cost-plus contract arrangement the contractor is paid for the actual cost of the work (labour and materials) it carries out, plus an agreed percentage on those actual costs for the contractor’s margin for profit, preliminaries and corporate overheads. This contract form might be used on projects when the total amount payable to the contractor cannot reasonably be determined at the time of entering into the contract, or if the scope of work is unknown or not adequately developed. The principal to a cost-plus contract takes the risk of that final cost of works.

A cost-plus contract is not equivalent to:

  • a typical lump sum contract that allows for variations to the contract sum or a ‘rise and fall’ mechanism to adjust scheduled prices and rates
  • any other contract form that is to be priced by reference to scheduled sums and rates and a bill of quantities.

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