Contract documents

February 17, 2023

The budget: A staple in American households. It provides financial structure, and guidance while keeping family money matters running smoothly. But sometimes, an unexpected expense arises, and this is where things can go off the rails. A blown transmission, a water heater that needs replacing, or major appliance purchase. All these things can lead to a household fiscal meltdown.

Let’s face it, these things are part of the life contract families sign in some form or fashion. Too bad life has no promise to reimburse and add a little more to the wallet when the dust settles. Too bad that, unlike construction, life doesn’t come with a cost-plus reimbursement contract.

What are Cost-Plus Reimbursement Contracts?

A cost-plus reimbursement contract calls for the contractor to be paid for all construction project expenses and additional agreed-upon fees. Unlike fixed-price contracts where expenses, (even the unexpected ones!), are the responsibility of the contractor, cost-plus reimbursement contracts are different. Any increase in expenses falls at the feet of the owner. Couple this with the additional fees in the agreement makes it an attractive option for contractors and owners alike. That’s right, owners benefit too. On the surface, it looks as though contractors are the only winner, but a closer look shows that there’s something for everyone.

 For owners

 For an owner, entering a cost-plus reimbursement contract comes with several advantages. For starters, they can expect premium labor and materials. Also, in this agreement, contractors understand that they’re due reimbursement fees and bonuses. This is because they agreed to pay for the expenses. With that, the need to skimp on labor or materials is eliminated which ultimately leads to a higher quality of work.

Pricing is also beneficial. Overbidding is something every owner faces from time to time as contractors look to either add profit or protect themselves from a loss. With a cost-plus reimbursement contract, contractors understand that a bonus structure already exists. As such, owners can expect to receive fair pricing and honest bids.

Contractor efficiency rises when a cost-plus reimbursement contract is used. These contracts often contain performance-based clauses with financial repercussions directly tied to them. These clauses incentivize contractors to efficiently deliver their highest quality work.

A couple of caveats an owner should consider before signing off are contractor cash flow and working capital. Contractors are essentially expected to fund the project. If a contractor is financially challenged, entering this agreement where adequate cash on hand is a must could be problematic.

For contractors

Contractors can reap considerable rewards from a cost-plus reimbursement contract. For example, projects that use these agreements typically come with unknowns including designs and costs. As the scope of the project becomes clearer, the chances for additional profits might appear which is a win for any contractor.

When it comes to a project of any size, estimating can be a challenge. Even for the most experienced professional, accuracy in estimations isn’t a given. The good news is that cost-plus reimbursement contracts are essentially estimate-as-you-go instruments. With that, contractors can estimate costs as they become necessary. This is far easier than doing it all at once which is where challenges tend to occur.

For contractors, risks are always a factor when taking on a project, but under this agreement, they’re all but eliminated. This is because any expenses are the responsibility of the owner. To be clear, owners don’t typically walk into this situation haphazardly. Most use what’s known as a maximum cost clause before work begins. This clause caps expenses and keeps the project from damaging the owner financially while still positioning both parties for success.

Conclusion

Under the right circumstances, a cost-plus reimbursement contract is a perfect document. For contractors, it reduces risk, takes the guesswork out of estimating, and contains additional performance-based profits. The view for an owner is equally appealing. They’ll get the highest quality of work a contractor has to offer, including labor and materials, while maintaining cost and timeline integrity.

Unexpected household expenses are a part of the life contract every family signs. Whether you’re a contractor or owner, consider signing a cost-plus reimbursement contract for your next project. It could save the headaches, disappointments, and unexpected expenses … and add a little to your wallet.

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.