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How to Avoid Payment Disputes with Cost-Plus Contracts

When it comes to getting paid for your work, it should be straightforward – submit an invoice and get paid. Rarely, however, is this transaction so simple. The culprit of payment disputes usually boils down to the contract. The key to neutralizing tensions surrounding payment terms (and getting paid), is to establish a simple contract with clear language around provisions and contingencies. Careful attention during contract negotiations will signal to the owner that you are trustworthy and protect your interests.

When a construction project involves a healthy degree of variability and requires ancillary purchases, a contractor will usually enter into a cost-plus agreement. Cost-plus agreements ensure a contractor receives payment for the expenses of the job, plus profit. The contract is also designed to protect the owner from unnecessary charges or overages. Profit percentages are pre-determined, and costs are broken down to fit into one of two categories – indirect or direct costs. Because these projects are difficult to scope, the contract is complex and requires a lot of supervision and project controls. The following best practices will help you craft and manage a solid cost-plus agreement.

  • The key to having an excellent cost-plus contract is paying attention to the details. Impeccable recordkeeping will help you get paid at the right intervals for the right amounts. Itemizing expenditures cannot be a stack of receipts. To protect their interest, owners will want to see organized and itemized records. Consider leveraging a tracking platform to help you keep track of costs. When drawing up the contract, include a provision that offers documentation at the time of draw requests. This rigorous control will hold you accountable and leave little room for dispute.
  • Cost-plus agreements require advanced project controls and excellent cost accounting standards. Your reimbursement provisions should define
    • the rates being charged for labor and equipment,
    • what is and is not reimbursable, and
    • the cost of stored materials.
  • While most contracts will issue subcontracts on a lump-sum basis, expect your client to define detailed competitive bidding requirements in an effort to gain more visibility into the subcontractor process.
  • General conditions costs are usually lumped into one bucket. To avoid disputes over the allocation of these variable and fixed costs, consider modifying your contract to treat general conditions as a lump sum. It is critical to define as accurately as possible the components of these costs, as failing to do so will result in additional (and negotiable) reimbursable expenses.
  • When it comes to contingencies, ensure both parties are on the same page by formally documenting an understanding of terms. The purpose is set forth to conditions that clearly define what an unforeseen condition is and what could be constituted as a risk you assume in agreeing to the GMP.
  • Be aware that it is within your client’s right to audit your records. It is crucial to define clear expectations as to what you need to produce, how you will provide it, and when you will (and no longer) deliver the information.
    • Disputes happen. When it comes to audit documents, be sure to specify the scope of the owner’s rights, paying close attention to your right to protect sensitive competitive information. By negotiating the forum for dispute resolution by arbitration versus litigation, you can limit the discovery process.

When you enter into a cost-plus agreement with your client, remember, no detail is too small, record-keeping is your friend, and sightlines are important to owners. When both parties are proactive in the formation of the agreement, they can better protect their interests. If you need assistance with developing a beneficial cost accounting methodology, contact the professionals in our office today. We can recommend best practices for your contract negotiations to minimize the negative impact of payment disputes.