AIA Cost Plus Contract: What is it?
AIA Cost Plus Contracts are construction contracts that specify the owner will only pay the general contractor or construction manager for all the costs associated with the project, including labor and materials, plus an agreed-upon fee. As such, this type of contract is typically used in more complex projects with an uncertain scope of work that cannot be estimated beforehand. The "Cost" in Cost Reimbursable Contract includes direct costs, or those not subject to negotiation between the parties and fees applied for use of overhead and profit . These fees are typically established as a percentage of the estimated total costs of the work before the scope of the project begins changes.
Depending on the particular AIA Cost Plus Contract (there are multiple forms available), the general contractor’s maximum compensation can be determined as a percentage of the cost of the work (which typically includes labor and materials) or as a specified amount plus the cost of the work. Cost Plus Contracts are also known as Cost Reimbursable Contracts.
Core Elements of Cost Plus Contract
The core components of an AIA Cost Plus Contract begin with a clear delineation of costs that are considered "allowable" in the construction process. What constitutes "allowable costs" within the context of a Cost Plus Contract under the AIA Standard Form is a trigger to additional ethical and legal issues. A Contract that contains reference to "allowable costs" may be subject to review under State anti-kickback laws (like the Miller Act’s) and pay-when-paid type obligations, requiring more detailed accounting than most Contractors and clients prefer. It is suggested that Contractually limiting allowable costs to those costs "in accordance with generally accepted accounting principles" will assist in mitigating risk of violation of such laws and/or contractually limiting liability for pure accounting errors that may occur at the end of the taking of a Cost Plus Contract.
There are two types of Contractor fees in an AIA Cost Plus Contract: fixed and percentage. A fixed fee is exactly what it sounds like: a set fee for the Contract. A fixed fee is typically agreed upon and paid in intervals through the course of construction. A percentage fee, on the other hand, is based on the final cost of the project and is paid out periodically until the project is completed. When a Cost Plus Contract has both a fixed and percentage fee, it is generally referred to as a "fixed plus fixed fee." Cost Plus Contracts, when using AIA Standard Forms, do not deal with fee disputes, payment issues, or construction changes. These issues are typically dealt with in separate documents, although the Cost Plus Contract will frequently refer to the governing agreement.
The "reimbursement structure" in an AIA Cost Plus Contract is twofold: first, the Contractor’s fee is not reimbursable, so only a Contract that clearly sets Contractor fees apart from costs will be considered reasonable for purposes of recovery if challenged; second, only costs incurred under the Contract are recoverable and only from the applicable party. A party cannot recover out-of-pocket costs incurred unless the Contract with the client expressly allows for such recovery. These costs can be significant and must be used in the examples provided throughout this Practice Area.
Advantages of an AIA Cost Plus Contract
Unlike a fixed price or lump sum contract, an AIA cost plus contract bases the cost of the work on the contractors actual costs, subject to a fee that is typically a specific percentage of the total cost of the work. Alternatively, it can be a specific fee which is based on the number of hours the contractor expects to work on the project at its established hourly rates.
The primary advantage of a cost plus contract for a construction project from the perspective of a builder or contractor is flexibility. If additional work is needed, it can be added with only a change order. Conversely, if the scope of the project is reduced, rather than paying for work that the contractor has completed to date, the owner will only pay for the work the contractor has actually completed. In short, a cost plus project enables adjustments to be made relatively quickly and easily for both increases or reductions in scope.
One of the reasons a cost plus contract is more flexible is that the owner does not need to determine a guaranteed maximum price at the outset of the project. The owner will only pay for work actually performed (including materials and labor) on the project. If, as many projects do, the scope of the work expands from the original plan, the owner has no need to be concerned that it will have to pay a predetermined sum in excess of the work actually performed.
Perhaps even more importantly, a properly drafted cost plus contract will be transparent to the owner. Since the project cost is based on actual work performed, the owner should not find itself paying more than what work was performed, regardless of whether the contractor’s costs to complete the work were greater or lesser than estimated. The owner only pays for the work that was done, leaving the contractor with little incentive to inflate its costs. In other words, an owner should be able to rely on the actual cost of the work performed on a cost plus project, without concern that the contractor might be overcharging them.
Of course, like all contracts, a cost plus contract is only as good as it is enforced. To the extent that the owner does not review and/or question charges, costs paid for the project may exceed the actual costs necessary to perform the work. Accordingly, the most appropriate type of contract will depend on the specific needs of the owner, the nature of the project, and the parties involved.
Drawbacks and Risks
While the potential for flexibility inherent in AIA Cost Plus Contracts is certainly an attractive feature, these contracts present risks and challenges that will require the attention of both parties to the contract. Like other cost plus contracts, there is a substantial risk of cost overruns and a tendency for the contractor or subcontractor to inflate time and material costs to maximize the fee. The client must be diligent to verify all such charges since it does not adhere to any specific limit for costs and fees. Disputes over cost can also lead to conflict, particularly when money is tight. It is essential that the Parties adhere to the dispute resolution provisions within the contract, and they may benefit from hiring a third party expert to carefully evaluate the expenditures. AIA Cost Plus Contracts require meticulous record-keeping and invoice management. The Parties must be supremely organized and detail-oriented to prevent mismanagement of the contract. If no records exist to support a claim, recovery will be impossible.
Best Practices for Effective Management
When it comes to the successful management of AIA Cost Plus Contracts, maintaining transparency, ensuring accurate accounting, and promoting effective communication between the parties are paramount. From the outset, it is important that owners, contractors, and subcontractors have a shared understanding of how the contract will work. Familiarity with budgeting and accounting terms is essential and can facilitate better dialogue when discussing the intricacies of the project.
Budgets and scheduled expenditures should be regularly reviewed and monitored to ensure that the project is staying on track. Any unforeseen obstacles should be accounted for and addressed in a timely manner . Close attention should be paid to the application for payment process to ensure there are no disputes or delays in receiving payment.
Additionally, all parties should be actively engaged in the management process. This requires open communication regarding changes and discovered deficiencies. Everyone, from the architect to the owner, must be aware of the current budget and any alterations that are being made to the scope of work. Complete and accurate documentation should be maintained by all parties and should be made available upon request. By establishing a culture where open dialogue and accurate accounting are the norm, AIA Cost Plus Contracts can be managed in an efficient and effective manner.
Comparison to Fixed Price Contract Models
As with any form of an Owner/Contractor Agreement, Cost Plus Contracts, including AIA Cost Plus Contracts, have advantages and disadvantages to each party. A fixed price contract is when a Contractor agrees to do the work at a set cost and assumes the risk of being paid only that amount. If the work goes over budget due to costs of materials going up or the Contractor buying the most expensive piece of equipment for the project or if material prices were miscalculated when originally providing the bid, it is solely the Contractor’s loss.
Like AIA Cost Plus Contracts, a Fixed Price Contract allows the Owner to get the work done at a known cost before the work begins. However, a Fixed Price Contract also sets the Contractor’s compensation. This means that if the Owner is not concerned with how the scope of work changes during performance of the Contract, a Fixed Price Contract is often the right choice.
Moreover, if the Owner knows that they have the funds to complete the work and wants the project done quickly, the fixed price contract can be best. Similarly, if the Owner knows they want certain items incorporated into the final project regardless of cost, then a fixed price contract can provide the Owner with the certainty they crave.
However, if the Owner is open to discussing alternative materials within reason, uses a design/build system, and has the ability to fund the project without a fixed budget, a Cost Plus Contract like an AIA Cost Plus Contract may be best.
If the Project uses an AIA Document, the Guaranteed Maximum Price Amendment usually comes into play. The GMP is the dollar amount the Owner will pay the Contractor for all work and services once the GMP is agreed to by the parties. The GMP may encompass the Project’s total cost, or it may include the Project’s cost of labor and materials but exclude the cost of overhead and profit. The value of the GMP sometimes lies in the GMP amendment, which can provide an estimated cost breakdown (among other things that are not the subject of blog posts and I will leave to the parties to determine).
Legal Compliance and Considerations
AIA contracts are not necessarily separate from state laws, as many people believe. It is always good practice to have an attorney review your AIA contracts before you sign them, especially if you will be doing work in other states as well.
The AIA CMa contract has specific clauses dealing with the construction schedule, certification of costs, periodic updates to construction cost estimates, and the contract sum with any modifications to the document. If you find yourself negotiating an AIA contract, you may want to change the method of payment in Section 9.4 with language such as the Owner shall pay the CM after approval of the Contract award and after completion of the project. Also, omit Section 3.6 which deals with allowing the Owner to perform emergency work without consent of the Architect.
If local or state laws dictate other circumstances regarding the handling of internal disputes other than what is included in the AIA contract, you should follow those laws. For example, New York EPTL 5-167 establishes exclusive jurisdiction for the state Supreme Court in New York County to hear cases dealing with dispute continuances.
Wrap-up and Recommendations
In conclusion, AIA Cost Plus Contracts can provide substantial benefits in terms of flexibility, risk mitigation, and budget management. They can be particularly useful in projects with less defined scopes of work or in instances where project requirements and costs are likely to evolve over time. However, they also present unique challenges that need to be carefully navigated.
The best practices for utilizing AIA Cost Plus Contracts revolve around clear communication, thorough documentation, and active management of costs. All parties involved should be fully informed of what to expect and should closely monitor progress to identify issues early on. Developing and adhering to a transparent system for tracking and reporting costs is essential in preventing and mitigating disputes .
Using Contract Addendums as a means of handling unforeseen costs can further streamline the process and reduce the potential for misunderstandings and conflicts. All material and labor costs should be clearly documented and substantiated with the appropriate invoices and receipts. The importance of accuracy in record keeping cannot be overstated, as it can make or break a contract.
Finally, working closely with an experienced construction attorney can make a significant difference in one’s capacity to avoid and resolve disputes under AIA Cost Plus Contracts. Of course, these contracts aren’t the right choice for every project, but with careful planning and execution, Cost Plus Contracts can prove to be highly effective in streamlining the construction while reducing risks and unexpected costs.