3.2.4 The Cost Plus a Fee Contract

Although this form of contract appears to be rather easy to comprehend, without an agreement on what constitutes reimbursable costs and what constitutes nonreimbursable costs, the Cost Plus a Fee contract can generate lots of misunderstandings. And quite often a Cost Plus a Fee contract is executed where the owner is given an “order of magnitude” for the final cost which, depending upon a rather defined scope, can be another area of misunderstanding.
The writer was involved in one such Cost Plus contract where the owner kept increasing the scope of the work and the $250,000 initial ballpark figure ballooned to $950,000. Even with constant weekly updates to apprise the owner of the added cost of replacing all light fixtures in a 40,000 square foot store and replacing all of the flooring, among other additions, they were still shocked by the final price. It is therefore very important to document any and all changes to an initial scope of work when a Cost Plus contract is employed.
The Cost Plus contract is frequently used to deal with emergencies. Damage from a fire, a flood, wind, or rain demands quick action, and an owner is likely to ask his or her contractor to just jump in and get the work done. There are instances other than emergencies when a Cost Plus contract will be considered, such as a commercial owner desirous of completing space for a new tenant with a move-in deadline or the need to begin construction of a limited scope on a small project prior to final completion of the plans and specifications.

To avoid misunderstandings over what constitutes a reimbursable or nonreimbursable cost, a good reference document is AIA Document A111, Cost of the Work Plus a Fee with a Negotiated Guaranteed Maximum Price. This contract form contains a list of costs, both reimbursable and nonreimbursable.

Reimbursable costs include:

1. Labor costs including burden.
2. Wages and salaries of the contractor’s administrative and supervisory staff when stationed in the field with the owner’s approval. If any non-field-based personnel are to be reimbursed, they should be listed with the proviso “with the owner’s approval.”
3. Taxes, insurance, employer contributions, assessments.
4. Subcontractor costs.
5. Cost of materials and equipment incorporated in the completed project.
6. Cost of other materials, temporary facilities, and related items fully consumed in the performance of the work.
7. Rental costs for temporary facilities, machinery, equipment, and hand tools not customarily owned by construction workers whether rented from the contractor or others.
8. Cost of removal of debris from the site.
9. Costs of document reproduction, faxes, telephones, postage, expedited delivery services, and reasonable petty-cash disbursements.
10. Travel expenses by the contractor while discharging duties connected with the work.
11. Cost of materials and equipment stored off-site—if approved in advance by the owner and accompanied by a bill of sale and storage and transit insurance.
12. Related portion of insurance and bond premiums.
13. Sales and use taxes.
14. Fees—assessments for building and related permits, agency inspections.
15. Fees for testing—laboratory and field.
16. Royalties—license fees for use of a particular design, process, or product.
17. Data processing costs related to the work.
18. Deposits lost for causes beyond contractor’s control.
19. Legal, mediation, and arbitration costs with the owner’s prior approval.
20. Expenses incurred by the contractor for temporary living allowances.
21. Cost to correct or repair damaged work provided that such work was not damaged due to negligence by the contractor or is judged nonconforming by the owner’s design consultants.

Nonreimbursable costs include:

1. Salaries and other compensation of the contractor’s personnel stationed at the contractor’s principal office, except as specifically provided for in the contract.
2. Expenses of the contractor’s principal office.
3. Overhead and general expenses except as provided for in the contract.
4. The contractor’s capital expenses.
5. Costs due to negligence of the contractor.
6. In the case of a GMP contract, costs, other than approved change orders, which would cause the GMP to be increased.
7. A catchall—any costs not specifically included in the Costs to be Reimbursed.
This list can be added to or modified to meet individual project needs and should be attached to the construction contract as an Exhibit.
Several other attachments are helpful in identifying costs and avoiding misunderstanding as to what constitutes “cost”:

• A complete hourly rate breakdown for each trade anticipated to work on the project. Section 3.2.5 is an example of carpenter rates for a union worker for both regular and premium time work.
• A list of management/estimating/purchasing personnel hourly rates (if applicable).
• A list of equipment proposed for use on the project with hourly rates, exclusive of the operator’s hourly rate, which can be attached. Section 3.2.6 provides an example.