By AIA Contract Documents
May 4, 2022
Cost-plus procurement methods are frequently used when the scope of work has not been completely defined, but the owner needs construction to begin to meet a fast-track timeline, which is why this compensation method is popular in construction manager projects.
There’s a lot of transparency in a cost-plus contract for the owner, because the actual costs of the project are documented, and many are written with a guaranteed maximum price (GMP), such as AIA Contract Document A133-2019. For instance, an owner agrees to pay the cost of the work, including labor, materials, and equipment, plus a predefined amount for the contractor’s overhead and profit. If actual costs are lower than estimated, the owner keeps the savings. If the actual costs are higher than estimated, the owner pays the additional amount up, but only up to the GMP. The contractor is still required to deliver the project, even if the costs exceed the GMP.
A cost-plus with a GMP automatically builds in flexibility for the owner and the contractor. However, there are some challenges, particularly in today’s environment:
Max Price Missteps: Likely the biggest challenge in a cost plus with a GMP contract is when to set the GMP figure. The earlier that number is set in the design process, the greater the possibility of unexpected circumstances that will blow the agreed on GMP number out of the water. Price inflation and supply chain challenges could be an issue in today’s current environment even with the flexibility of a GMP.
Contingency Confusion: Many contracts include contingencies, money held in reserve to cover unexpected costs that could arise during a construction project. While everyone agrees that money should be held in reserve, some forget to outline where that money goes if it’s not used – the contractor or back to the owner? In many cases, the owner might use the GMP to incentive contractors to deliver projects more efficiently. For instance, if there’s a $100K GMP, the contract might stipulate that the contractor will be able to keep a certain percentage of any savings under the GMP for completing a project sooner or for less cost.
Detailed Tracking/Supervision: Cost-plus with a GMP contract require continuous and careful documentation with every expense detailed and comprehensive invoices. While that level of detail provides transparency, it also makes the payment application process cumbersome for the contractor who has to prepare the applications and the owner who has to review them.
A cost-plus contract with a GMP is a great way for an owner to optimize the construction process with a lot of transparency. However, beware setting the GMP too early, review stipulated contingencies and make sure your workflows are equipped to handle the high level of tracking required throughout the project.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.