The Evolution of Cost Based Contracts in Construction

By Enabliser Greg

It is very interesting to see the way that Cost Based Contracts have evolved over the years. In an effort to minimise risk, more and more Construction companies are entering into Cost Based Contracts with clients instead of the traditional Lump Sum Contract.

A Lump Sum Contract is an agreed sum usually broken up into instalments referred to as Contract Items.  A Cost Based Contract is where the billing to the client is based on the “Cost” of the project.

There are a number of different types of Cost Based Contracts:

Cost Plus - this is where the value of the cost of the project for a period has a percentage added to it to calculate the value eg Cost Plus 15%
Cost Plus by Category – Subcontract Cost + 20%, Material Cost + 15% etc
Hourly & Cost Plus - Another Variation to the Cost Based Contracts is the Charging of Hourly rates in combination with Cost Plus.  In this scenario, the Contract will stipulate an agreed set of rates for different types of Labour.eg
Carpenter $60 per Hour, 
Foreman $80 per Hour, 
Project Manager $100 per Hour 
in addition to the Cost Plus 15% on Materials

Combination Lump Sum and Cost Plus Contract:
In another development we are seeing a combination of both Contract types.
Here you could have a Fixed Price up to say $1M and then; 
Cost Plus scenario after this OR 
You could have a different combination. 

Mixed Cost Base. You can also have a mixed Cost Based Contract as follows:
Contract Item Slab – Lump Sum $150,000
Contract Item Landscaping – Cost Plus 15%
Overall Add-on Admin Fee 5%

While these Cost Based Contracts will reduce risk for the contractor, they can add a lot of extra work to the administration and accounting, keeping track of how billing is calculated. This is where a good construction focused accounting system can help, and Enabling. We have many years experience helping construction companies and contractors manage their business better, and with systems that understand all this.

To find out more about construction accounting systems, click here

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