Louisiana Construction Contract Cost Plus or Fixed Fee
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FAQ
Unlike a fixed-cost construction contract, a cost-plus construction agreement is a contract in which the owner pays the contractor the actual costs of the materials and labor plus an additional negotiated fee or percentage over that amount.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract's full price.
Cost plus pricing involves adding a markup to the cost of goods and services to arrive at a selling price. Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to it a markup percentage in order to derive the price of the product.
A cost-plus contract, also known as a cost-reimbursement contract, is a form of contract wherein the contractor is paid for all of their construction-related expenses. Plus, the contractor is paid a specific agreed-upon amount for profit.
A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract.
A Cost-Based Pricing Example Suppose that a company sells a product for $1, and that $1 includes all the costs that go into making and marketing the product. The company may then add a percentage on top of that $1 as the "plus" part of cost-plus pricing. That portion of the price is the company's profit.
A cost-plus basis for a contract for work to be done is one in which the buyer agrees to pay the seller or contractor all the cost plus a profit. All vessels were to be built on a cost-plus basis.
A fixed price contract sets a total price for all construction-related activities during a project. Many fixed price contracts include benefits for early termination and penalties for a late termination to give the contractors incentives to ensure the project is completed on time and within scope.
In the cost plus a percentage arrangement, the contractor bills the client for his direct costs for labor, materials, and subs, plus a percentage to cover his overhead and profit. Markups might range anywhere from 10% to 25%.