Cost and Fee Contract: Everything You Need to Know
A cost and fee contract is a type of cost-reimbursement contract. It is typically referred to as a cost-plus contract.3 min read
A cost and fee contract is a type of cost-reimbursement contract. It is typically referred to as a cost-plus contract. This type of contract outlines how a contractor is to be paid for the construction expenses that are incurred while performing a job. In many instances, a cost-plus contract will set a limit on how much the contractor can spend for expenses. It is important to have this type of contract for numerous reasons.
How Do Cost and Fee Contracts Protect Contractors?
First, it helps protect the contractor to ensure he will be paid not only for performing the job but for the expenses that are incurred while completing the project. This type of contract has the potential to boost profits for contractors and they became very controversial during the Iraq War. By minimizing costs, this allows contractors to put more money back into their pocket.
For example, if a contractor signs a cost-plus contract in the amount of $50,000 plus $25,000 for expenses, the contractor can minimize his expenses yet say he used the full $25,000. This allows him to increase his profit potential.
A contractor will always lean toward a cost-plus contract because it helps ensure that all project-related expenses will be covered. It is important, however, to keep in mind that the contractor will have to provide proof, such as receipts, to show how the expense money was spent. Plus, there is always the possibility that some of the claimed expenses could be denied. The more proof a contractor has to show how the expense related to the job, the more likely he is to be fully reimbursed.
Do Cost and Fee Contracts Include Clauses?
Most cost and fee contracts will have a section that outlines certain clauses. Generally, the contract will likely outline the maximum amount of money that is guaranteed to be reimbursed. The number will indicate to the contractor that he has only a certain amount of money that can be spent on expenses. This part of the contract is especially important because it allows a contractor to determine if he can actually perform the job according to the allowed expense amount.
Let's say a contractor is given a maximum expense cost amount of $15,000, but he knows that it will take at least $20,000 for him to perform the job according to high-quality standards. In this type of instance, he could try to renegotiate the maximum cost amount, or he can decide not to bid on the job.
A lot of the time, there will be a savings clause, which is an incentive for the contractor to save as much money as possible on the job. For example, if a project has a maximum expense cost amount of $15,000 and the contractor is given a 20% commission for completing the job under this amount. If he ends up completing the job and only uses $8,000 of the maximum cost amount, then he will receive a 20% commission on the $7,000 that was saved. This is a commission bonus of $1,400.
What Is a CPFF?
A cost-plus-fixed-fee contract is commonly referred to as a CPFF contract. This type of contract guarantees the contractor will receive a reimbursement for the expenses as well as a predetermined fee. This amount is agreed upon before the project takes place and is not paid out until the project has been completed. The fee does not change no matter how much the project ends up costing. It's important to note, though, that the fee can change if the scope of the work was to change.
CPFFs come in two different forms:
- Completion: When a completion contract is created, this means a payout is not given until the entire project is completed. In this type of contract, expenses are still reimbursed even if they exceed the maximum expense cost amount. The fixed fee, however, does not change.
- Term: The contractor is paid after a specific time period, regardless of whether the project is completed or not. If it's not completed, a new agreement is made and it outlines how much more money the contractor will receive for completing the project in its entirety.
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