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Traditional bidding is
giving way to other means of pricing and project delivery. More clients are
using negotiated cost-plus contracts, many with a guaranteed maximum price
and some with a savings split. In separate articles we have examined and
compared the advantages and disadvantages of the various construction
delivery methods including the traditional design-bid-build, design-build
and partnering where the A111, Cost Plus Agreement is used. The cost-plus
contract can be the best choice for many of our clients when one or more of
the following conditions exist:
1. Where the construction market is hot
and most good Contractors are
too busy to have
any interest in a traditional bid.
2. Where the Owner has an established
relationship with a reputable
Contractor and there is
already a level of trust and confidence
between them.
3. Where the Architect has had a positive
history with the Contractor.
4. Where there is an ambitious schedule or a
tight budget.
5. Where the Owner desires to handle a
significant segment of the work
on a project separate
from the general contract; use volunteer labor,
donated materials or use
their own sub contractors or suppliers.
However, the following may present difficulties for some Owners who are not
familiar with Cost Plus Agreements:
1. The possibility that the Contractor will
use cost savings (which should
accrue to the
Owner) to cover cost overruns in General Conditions or
field overhead.
This can be prevented by capping General Conditions.
2. The possibility that the Contractor will
self perform some of the work
originally priced
out by sub contractors. This potential conflict of interest
may not be a
problem if the quality of the work does not suffer, or the
cost does not
exceed the subs price. This can be prevented by
establishing,
during negotiations, which work may be self-performed
by the Contractor.
3. The possibility that the Owner will be
nickel and dimed by the Contractor
in General
Conditions costs. If the Contractor is charging commercial
rental rates for
equipment he already owns, by the end of the job the
Owner may have paid
for some tools and equipment several times over.
This can be avoided
by capping General Conditions or prohibiting the
practice of
charging rent for tools already owned.
4. The possibility that the cost of major
mistakes by the Contractor will be
paid by the Owner.
While the cost of some errors may be absorbed by
the sub
contractors, mistakes may cost the Owner (in savings that are
never achieved)
unless the job cost exceeds the guaranteed max.
5. The possibility that the Owner will not
receive credit for the Contractors
fee on deductive
change orders. If the fee is looked at as a percentage
of cost, the Owner
may feel that a credit for mark-up on the deductive
changes should be
mandatory. Most Contractors see their fee as
overhead and
profit, which should not be reduced just because some
portion of the work
is deleted. This problem can be avoided by
negotiating up
front what size or type of credit change order should
include a credit
for the Contractors fee.
6. The possibility that the Contractor will
deliberately overprice the job,
knowing that he
will get a share of the savings when he brings the job in
for less than the
maximum. Building in an agreed on percentage of the
savings is the best
way to assure the Contractor will work hard to save
money for the
Owner. However, the Contractor can make more on the
savings than on the
fee for the project, if he pads the guaranteed
maximum enough.
Having a Contractor you know and trust is the best
solution to this
problem. Some Contractors will return all cost savings
to the Owner.
In conclusion, under a cost-plus contract, the Contractor has a
responsibility to act in the best financial interests of his client. The
Owner must have a level of trust and confidence in the Contractor so that
these pitfalls will not become a problem.
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