Overview of Cost-Plus Construction Contracts

By AIA Contract Documents

March 23, 2023

A cost-plus contract is a type of contract commonly used in the construction industry. This type of contract allows for the reimbursement of all the direct costs incurred by the contractor, along with an additional percentage of profit, usually negotiated between the parties.

Under a cost-plus contract, the contractor is reimbursed for all costs incurred during the project, including labor, materials, equipment, and overhead costs. This means that the actual cost of the project is determined by the contractor’s expenses, and not by a predetermined fixed price.

The contractor is also entitled to a fee or percentage of the total cost of the project, which is intended to cover the contractor’s overhead and profit. This fee is often a negotiated percentage of the total cost of the project, and it can vary depending on the type of project, the complexity of the work, and the risk involved.

One of the main advantages of a cost-plus contract is that it allows for greater flexibility during the construction process. Since the contractor is reimbursed for all expenses, they can make changes and adjustments to the project without having to renegotiate the contract price. This can be particularly useful in projects where unexpected changes or issues arise, and where a fixed price contract would not be appropriate.

However, cost-plus contracts can also be riskier for the owner, as they can potentially lead to higher costs if the contractor incurs unforeseen expenses. Additionally, because the contractor’s profit is tied to the total cost of the project, there may be less incentive for the contractor to control costs.

Overall, cost-plus contracts can be a useful tool for managing projects in certain industries, but they require careful negotiation and management to ensure that both parties are protected and that costs are controlled.

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.