Everything You Need to Know About an Open Book Contract
An open book contract is an agreement between a buyer and seller that lays out a work/service agreement where the costs are not finite.3 min read
An open book contract is an agreement between a buyer and seller that lays out a work/service agreement where the costs are not finite. Additionally, there will be a margin that the supplier can add to the final cost for their services. Once the project is completed, the supplier provides an invoice for the materials used based on the actual cost plus the agreed-upon margins set forth in the contract.
When starting any type of construction project, planning the project is essential to not only be sure all of your required elements are met but also to ensure you stay on budget. While it can be tempting to start a project as soon as you have it realized, moving too quickly can give rise to complications.
To make sure that your project meets your expectations and stays on budget, hiring a design-build firm may be the best choice for your project. When using a design-build firm, planning is often simplified and all of the players involved in the build and design can work together from the start, ensuring that the plan runs smoothly.
When using an open book contract, your will have complete transparency about everything including:
In essence, an open book contract structures the process of sharing the management of all costs, operations, and performance data that will occur with the project. To understand the approach of an open book contract, it is important to understand the fundamental definitions of both cost and price.
- Cost is cost. When creating a construction estimate, the costs should be based on the actual cost of work. Actual costs include labor, expenses, materials, equipment, and production costs.
- Price includes everything else in the contract. Anything that will be added above the actual costs will be counted under price. Some of the items that fall under the price category include operating costs, overhead, encumbrances, profit, burdens, markups, turnovers, charges, levies, and incentives.
Progressive design-builds are also a popular model for projects as they allow the project to continue on as a collaborative effort while fully defining all aspects of the project.
Benefits of an Open Book Contract
There are many benefits that can be expected with an open book contract, including:
- An earlier completion time — By utilizing a phased schedule, projects can be completed faster. Also, open book contracts use a stepped permit process which allows the construction and design components to begin at the same time.
- A reduction in cost — By knowing the actual upfront costs in the beginning of the project, you start with a more accurate budget and can allocate expenses for other parts of the project. Additionally, since the project will move at a quicker pace, you pay less overall with fewer overruns and the ability to begin occupancy earlier.
- Less surprises — In some construction projects lacking the transparency of an open book contract, there is the risk of being caught off-guard by additional costs and unexpected expenses. Without a proper schedule, you may also run into significant delays which can be costly and difficult to accommodate.
Open Book vs. Closed Book
To understand the differences between open book contracts and closed book contracts, you must first understand the difference between a closed book and open book system.
- A closed book system does not allow for influence by others, nor does it support interactions by others.
- An open book system promotes the dynamic interaction with others.
A closed book contract includes an overhead expense that is disseminated over multiple operational areas, making it hard to identify what the actual cost of each area is. Additionally, on closed book contracts, some general contractors may include a percentage of the overhead expense under the general conditions to make the overall appearance of the overhead fee lower. This can be done intentionally because many times people will go with the lowest bid.
In an open book contract, none of the costs are buried and it is easy to determine what percentage of the cost is associated with each operational section.
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