The Cost Plus Myth continued

In contrast to Cost-Plus contracts, is Stipulated Sum contract project delivery. Under this system the Contractor has a finite price for which to execute and deliver the project. As such, costs must be tightly managed and controlled in order for the Contractor to financially survive. Much can be (and has been) written and debated as to the merits of different Contract delivery systems, and most all of them uniquely depend upon specific project factors and variables. This includes the position that Cost-Plus is appropriate where project scope is not well defined and Stipulated Sum where project scope is well defined and detailed.

However limited project scope definition and Cost-Plus contract does not translate to no need for establishment of budgeted scope, quantitative, and cost targets, even if based on conceptual or schematic project definition.

In fact, Cost-Plus Contracts and project delivery arguably place, if not more, then equal pressure on the Contractor to tightly plan, execute, and account for the cost of the work. While cost-plus delivery implies unlimited budget, Contractors be warned that every project has a budget, and thereby funding limit. This is true whether the project is for a public entity or a wealthy private Owner/Client with implied unlimited funds and apparently little attention to cost. Cost-Plus delivery typically has more to do with limited project scope definition that it does ample available funds.

Uncontrolled execution of the work and cost expenditure will at some point catch the attention of the Client. At that point not only will the manner of cost management and record-keeping be brought into question, but attention will turn to overall project planning and execution in general. In all, this would be a very bad situation for a Contractor to find itself, and one that could be devastating to its reputation.

The subject article focuses on the demand for proper cost accounting and payment entitlement under a Cost-Plus Contract structure. However, proper cost management and accounting is also in the best interest of the Contractor’s financial performance, success, and survival. Proper, effective, and disciplined cost management and accounting, along with efficient work planning and productivity, is a necessary element of profitability, and therefore viability. Proper cost management also serves as the basis for the Contractor’s cost estimation and its ability to competitively procure work in an ever-more-competitive construction contracting market.

At the end of the day, a disciplined contractor’s cost management systems, processes, procedures, and controls should be established and implemented according to best practices regardless of Contract delivery method. Those systems can then be properly and credibly adapted and adjusted to different Contract requirements and processes across its portfolio of work. 

Myles-Dihigo , I. (2017, September 09). “Cost-Plus Contract and the Disorganized Contractor”. Retrieved November 15, 2017, from http://abaconstructionforumdivision1.blogspot.com/search?q=Cost-Plus%2BContract%2Band%2Bthe%2BDisorganized%2BContractor%E2%80%9D

The author, Tony Manning, Senior Vice President, Program and Project Management Group at Warner Construction Consultants, Inc., may be contacted at 301.670.9020 or tmanning@warnercon.com. 

Tony Manning, Senior Vice President

Tony Manning, Senior Vice President