Construction spending has climbed in the last several years since the mountainous declines of the Great Recession from 2008 to 2010. Construction managers and subcontractors, who survived those lean years, now find themselves in a market with abundant work and improving margins. Increasingly, construction projects are being contracted as cost-plus contracts, which include the design/build and Construction Manager at Risk (CMAR) delivery methods. These methods feature a guaranteed maximum price (GMP) that is established between the project owner and the selected construction manager. The GMP is effectively an estimate of the anticipated project costs and is subject to verification. The owner will ultimately pay the lesser of the actual costs at the project’s completion or the final guaranteed maximum price.
The Range of Cost-Plus Contract Benefits
A company may use a cost-plus contract with a GMP as opposed to a traditional hard-bid/lump-sum contract for the following reasons:
- A cost-plus contract allows the owner and the construction manager to initiate a partnering relationship. The construction manager is generally selected based on specific qualifications and works alongside the owner to develop the GMP. The construction manager often participates in value engineering and budget-related discussions to produce the quality of construction the owner desires at a price s/he can afford.
- These contracts are desirable when the project must be delivered in a set time frame. A cost-plus contract makes it easier for the project to start prior to 100% drawings, if necessary.
- Because of the nature of the contractual relationship, the risk of disagreements and litigation relative to change orders and project costs are significantly lower than that of a hard-bid/lump-sum contract.
Conducting the Pre-Project Summit
The owner-construction manager relationship – especially the costs associated with this partnership – should be monitored from beginning to completion of the project. Before establishing the original contract and GMP, the owner and construction manager should extensively review the contractual terms and estimates. Additionally, they should not only examine any potential expenses (e.g., labor burden, insurances, etc.), but also confirm that the owner understands and will pay these costs, if necessary. This front-end work can help to ensure a fair price, mitigate any possible issues during the project, and ease the financial closeout of the project.
Analyzing the Post-Project Cost Terrain
Once the project is complete, the construction manager records and presents the final costs. It is imperative that these expenses be examined for validity and compliance with the contract documents. In fact, every cost-plus-fee contract includes an audit clause that allows the owner access to the underlying cost records of the project. Many owners choose to engage a construction cost professional (typically a CPA) for both the front-end contract analysis and the financial closeout. Usually, that examination is done as an agreed-upon procedure (AUP) in which the construction cost professional examines those records for accuracy and completeness.
Harness CRI’s Expertise to Understand Cost-Plus Contracts
The result of using cost-plus contracts is a project that satisfies both the owner and the construction manager. The construction manager receives payment for successfully finishing the project, and the owner is certain that the final costs accurately reflect the construction team’s efforts. Contact CRI if your organization needs assistance with the financial aspects of your construction project. Whether you need to choose the right contract or analyze post-project results, we can guide you through even the steepest slopes to help see your project through to completion.