Cost Plus Percentage Of Cost: Everything You Need to Know
Cost plus percentage of cost is a method contractors often use to price services. This type of contract specifies that the buyer must pay all the project costs incurred by the seller, plus an additional amount for profit.3 min read
2. Benefits and Disadvantages
3. How Much Is the Markup Percentage?
4. What Costs Are Included?
5. Warnings About Cost Plus Percentage Contracts
Updated October 29, 2020:
Cost-plus percentage of cost is a method contractors often use to price services. This type of contract specifies that the buyer must pay all the project costs incurred by the seller, plus an additional amount for profit.
Products such as purses and services such as car detailing have fixed prices. Other services and projects, such as home remodels, have variable costs that are hard to predict. These depend on the cost of materials. Any changes or additions made while the work is being done might increase that expense. The cost plus percentage contract ensures contractors are reimbursed for the actual expenses they incur, rather than allowing for a fixed price that covers everything.
The cost-plus contract is also referred to as the cost-reimbursement contract. It includes a percentage cost on top of the seller's costs for their overhead. That way, the seller can make a profit from the transaction.
When Are Cost-Plus Contracts Used?
Cost-plus contracts are appropriate to use when it's difficult to determine the cost of items or estimate a project's cost in advance. These contracts place some of the risks of overhead expenses on the buyer rather than the seller.
Contractors often use cost-plus contracts when doing custom work or a type of work that is subject to frequent changes. In such cases, it is difficult to determine how much the contractor needs to spend on supplies ahead of time.
Some contractors use a cost-plus time contract, instead. This also varies and is based on how much time a job takes.
Benefits and Disadvantages
One drawback to cost-plus percentage contracts is they don't provide sellers with an incentive to keep costs low. However, clients usually ask for a list of expenses so they can verify the amount they are paying. This means the seller must keep careful track of everything spent and only bill for reasonable costs.
Cost-plus percentage contracts benefit the seller when the job he or she is doing requires buying a lot of materials. If the cost of supplies is minimal, there's no point in using this type of contract.
The disadvantage to the seller is that when a job requires extra time due to difficulties or unexpected occurrences, they won't be paid for the extra time because their material costs remain the same.
The time issue is a benefit to the buyer, however. Buyers don't need to worry about how long the project is taking because they will pay the same amount even if it takes longer than expected to complete.
If more material is needed, however, the cost will be higher; this is a disadvantage for the buyer. It becomes more difficult to budget for a project like this since the price might change as the project goes along.
How Much Is the Markup Percentage?
There is no standard amount of markup percentage cost. This can vary depending on:
- Market conditions
- Job type
Areas such as California or New England that have complicated building regulations typically have higher markup percentages than the Midwest for construction jobs. And remodeling markup is usually higher than new construction. Markup might also be higher when contractors are in high demand.
What Costs Are Included?
For a cost-plus percentage contract to work well, the contractor must provide all costs of materials purchased upon giving you the invoice. When providing the initial estimate, the contractor should list all costs that will be included in the bill. These typically include:
- Costs of employees, including taxes, workers' compensation, and other benefits.
- Subcontractor expenses.
- Materials used in the project.
- Bits, blades, and other consumable equipment.
- Dumpster rental.
- Vehicle expenses, such as rentals or fuel.
- Insurance costs.
- On-site supervision and security.
Warnings About Cost Plus Percentage Contracts
Often, cost-plus contracts are used by contractors who are not skilled at making estimates or don't want to bother creating detailed bids. To avoid exorbitant costs and disputes:
- Make sure the plans are as complete as possible.
- Get a fixed bid for as many parts of the project as you can.
- Try to include a “not to exceed” limit in the contract.
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