Cost plus contract risks
Cost-plus contracts, while offering flexibility and transparency, pose a unique set of risks to clients in residential construction projects. Understanding these potential pitfalls can help homeowners make informed decisions and mitigate unforeseen complications. Below are key risks associated with this contract type:
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Lack of Cost Certainty
Unlike fixed-price contracts, cost-plus agreements do not provide a definitive project cost upfront. This open-ended nature can lead to significant budget overruns if costs escalate unexpectedly. While clients are typically billed for actual expenses plus a percentage or fixed fee, they bear the financial burden of unexpected material price hikes or project scope changes.
Example: In a volatile market, sharp increases in material costs could quickly push the budget far beyond initial expectations, leaving the homeowner struggling to cover the additional expenses.
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Potential for Mismanagement
Cost-plus contracts can create less incentive for contractors to control costs. Since their fees often depend on a percentage of total expenses, higher costs may unintentionally benefit them. Without strict oversight, inefficiencies, overstaffing, or over-ordering materials could occur, increasing the financial burden on clients.
Mitigation Tip: Clients should insist on detailed documentation of costs and establish clear accountability measures, such as regular project reviews or independent audits.
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Ambiguity in Scope
If the project scope is not well-defined, clients may find themselves approving numerous change orders throughout the process, each adding to the project’s total cost. This risk is exacerbated by the collaborative and iterative nature of cost-plus agreements, where changes are common as the project evolves.
Solution:A comprehensive project scope and detailed cost breakdown should be established at the outset, reducing the chance of frequent, costly adjustments.
Administrative Complexity
Cost-plus contracts require meticulous record-keeping to track expenditures and maintain transparency. Without clear and accurate reporting, administrative complications can arise, potentially leading to disputes and eroding trust between the client and contractor.
Recommendation:
Clients should work with contractors who use reliable accounting systems and are committed to detailed cost reporting.
Engaging an architect with a strong understanding of Cost-Plus contracts and the builder’s accountability ensures proper oversight.
Consider adding a Quantity Surveyor or cost consultant to the project. These professionals can project future costs, providing greater financial clarity.
A major challenge in Cost-Plus contracts is uncertainty about future expenses. While current expenditures are documented, predicting the remaining costs is often difficult. A Quantity Surveyor or cost consultant can help mitigate this risk by offering detailed cost forecasts, reducing financial uncertainty for the client
Prolonged Timelines
In some cases, the flexibility of cost-plus contracts might result in slower project completion. As unforeseen changes are incorporated, timelines can stretch, delaying the project and incurring additional costs, particularly if temporary living arrangements are involved.
How to Prepare: Setting realistic deadlines and including provisions for time-based penalties in the contract can help ensure the project stays on schedule.
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Conclusion: Protecting Yourself as a Client
Cost-plus residential construction contracts can be advantageous in certain situations, particularly for projects with unknown variables or high complexity. However, the inherent risks require a proactive approach to ensure cost control, accountability, and clear communication. By working closely with reputable Architects, contractors, setting clear expectations, and being vigilant about documentation early, clients can navigate the challenges of cost-plus agreements and achieve their desired outcomes without undue financial or timeline stress.
