Cost plus contract

The contractor carries out the work and records its actual costs: labour, materials, plant, subcontractors and other agreed items. It then claims those costs, plus the agreed margin, in each progress claim, with evidence such as invoices and timesheets.

The contract defines what counts as a reimbursable cost. Anything outside that definition, such as head office costs or rework from the contractor's own defects, is usually excluded or covered by the margin. The principal, or its quantity surveyor, checks the records before paying.

For a deeper look, read The Rulebook of Revenue: A Guide to Construction Contracts.

• Cost plus percentage. The margin is a percentage of actual cost. Simple, but the contractor earns more as costs rise.

• Cost plus fixed fee. The margin is a set dollar amount, so the contractor has no incentive to increase cost.

• Cost plus with a guaranteed maximum price. Costs are reimbursed up to a cap, with costs above the cap borne by the contractor.

• Target cost. Savings or overruns against an agreed target are shared between the parties in set proportions.

Under a lump sum contract the contractor agrees a fixed price for a defined scope and carries the risk of its costs being higher than planned. Under a cost plus contract the principal pays what the work actually costs, so the principal carries that risk.

Cost plus suits early works, fit-outs with evolving design, emergency and repair work, and relationships built on trust. Lump sum suits projects with a complete design where the principal wants price certainty. For home building, some states regulate when cost plus contracts can be used, so check local domestic building legislation.

Cost plus is not a lesser form of contract. It is the right tool when a fixed price would mostly be guesswork. Typical situations include:

• Early works. Demolition, remediation or enabling works where site conditions are unknown.

• Fast-track projects. Work that has to start before the design is complete.

• Refurbishment. Existing buildings where hidden conditions make the scope hard to define.

• Emergency and insurance repairs. Work that needs to start immediately after damage.

The trade-off is that the principal needs more involvement, more cost reporting and a contractor it trusts. Many principals use cost plus for the uncertain stage, then switch to a lump sum once the scope is clear.

Whichever model is used, agree at the start how costs will be reported, how often forecasts are updated and who approves spending above set limits, so both parties see the final cost coming well before the end of the job.

• Loose definition of cost. Agree upfront what is reimbursable, including site staff, small tools, plant rates and related-party charges.

• Weak record keeping. Every cost needs supporting evidence. Missing dockets and timesheets lead to rejected claims.

• No budget reporting. Even without a fixed price, the principal needs regular forecasts of cost to complete.

• No audit rights. Principals should have a right to audit the contractor's books for the project.