We mention only the essence of several variations of cost-plus contracts, enough to make it clear that many creative approaches exist. To overcome the objection that the projects cost is not known until after completion, some owners utilise a guaranteed- (or warranted-) maximum-cost contract. This type of contract can be well suited to a project whose scope is well defined and seems particularly suited to turnkey projects. The contractor warrants that the project will be constructed in accordance with the project documents and the cost to the owner will not exceed some total maximum value. Note well that it must be clearly stated whether this maximum is the total costs (not including the fee) or the total that the owner pays, including the fee. Usually it is the latter and the contractor pays for any excess above the maximum.
The use of various penalty and bonus provisions is common with cost-plus contracts. A target estimate of costs is established, with the understanding that (1) savings accruing from actual costs less than the target will be shared between owner and contractor and (2) if actual costs exceed the target, the extra costs will be shared as well. It also possible to have a bonus incentive of type 1 without the type 2 penalty, although in this case a guaranteed maximum price may also be included in the contract. We should also note that incentive clauses may be related not only to costs but also to schedule and quality performance. Also, some contracts are written with variable fee percentage provisions, the actual fee being determined by a formula that considers cost performance relative to the target, as well, sometimes, as schedule performance. There are many possibilities!
In Australia, the use of trade contracts is another variation on the cost-plus theme. Here, a general contractor in a cost-plus contract may be required to secure fixed price subcontracts. As explained by McMullan (1994):
The Principal enters into a cost-plus contract with the prime contractor, the work is then contracted out by the prime contractor on a fixed price basis, the prime contractor being entitled to cost-plus reimbursement by the Principal for those trade contract prices. Effectively, therefore, the Principal has the benefit of fixed price contracting.
As an example of some of the features described in the previous paragraphs, consider a costplus- fixed-fee contract for a building project, where the estimated cost is £15 000 000 and the fixed fee is an additional £1 800 000, so that the best estimate of the total cost to the owner is over £16 800 000. The contract might stipulate a guaranteed maximum price of £17 500 000 as well as a target for costs of £15 250 000. (Note that this target need not necessarily be the £15 000 000 cost estimate.) Any savings in costs below £15 250 000 might be shared, with 25% going to the contractor as a bonus, while 25% (or some other percentage) of the excess costs above £15 250 000 might be assessed as a penalty. In any case, the owner would never have to pay more than £17 500 000. To the reader is left the exercise of calculating payments under various actual scenarios. Note that changes in the work can lead to changes in the agreed-upon values in this example.
