I was originally introduced to “Cost plus” contracting in the mid 1990’s. A trade magazine article discussed how the State of
Intrigued, I wondered how a cost plus method could benefit my customers and my residential construction business. After some study, I decided to implement a modified cost plus approach to fit my business model. I found my customers to be receptive and excited to participate in this type of program.
As the name implies “cost plus” contracting is based upon a transparent, open bidding process with all costs (materials, labor, supervision, project management and profit) clearly presented to the customer. Through the modified cost plus program, my company provided overall “expertise” and management for the project at a negotiated fee. Cash incentives were included in the contract to reward timely completion and higher quality production.
Typically, three bids for each sub category of work were obtained in order to compare subcontractors and suppliers and develop an overall budget. The customer, with guidance from the project manager, reviews each bid and selects the subcontractors and suppliers to be used for the project. This approach gives the customer and project manager a clear understanding of the overall project scope and cost. Should the scope of the project change, the additional work was addressed through the same cost plus bid process.
Throughout the project, the manager provides the customer with cash flow analysis to gauge construction progress, cost effectiveness and budget accuracy. I found that with monthly reviews involving all participants (customer, manager and subcontractors) the project moved forward smoothly with less chance for major surprises. In my experience, an open book policy with full participation and diligent project management has led to many successful projects and satisfied customers.
The cost plus method created an atmosphere of cooperation, encouraged greater customer involvement and gave the customer a sense of control over the project. As well, the company, suppliers and subcontractors gained clarity for the budgeting of capital and man power and allowed for better utilization of resources.
Through the cost plus contracting method, I was able to build collaborative partnerships with my customers that allowed for smoother operations and more accurate budgeting with confidence in overall profitability and growth.