There are various types of contracts utilized in the construction industry between the contractor and the property owner to convey the terms and scope of the work. These agreements are mutually binding, allowing both parties to plan for the project and the future. A well-crafted construction contract provides protection for the contractor and the property owner to ensure a smooth transaction.
A cost-plus contract is frequently used for a proposed project that does not have a detailed estimate of the work. In simplified terms, the contractor is reimbursed for all the construction costs, with an additional amount designated for profit. In a construction project, there are direct costs, indirect costs, and profit. Direct costs include labor, materials, equipment, and professional consultants needed to complete a project. Indirect costs are general overhead for contractors such as insurance, office supplies, miscellaneous expenses, travel expenses, and others. In negotiating a profit margin, some cost-plus contracts are fixed, and others offer incentives for quality technical skills, for finishing a project ahead of schedule or completing a project below budget.
Some Variations in Cost-Plus Agreements are:
- Fixed-fee contracts include direct and indirect costs with a pre-determined and non-negotiable fixed fee for a contractor’s profit, which is typically a percentage.
- Incentive fee contracts have provisions to provide profit incentives for meeting or exceeding pre-determined project objectives and the project’s direct and indirect costs.
- Award fee contracts include direct and indirect costs. The profit margin for the contractor is subject to the property owner’s evaluation of the project. Financial incentives are variable and paid if the work is completed according to the property owner’s satisfaction.
Liability Risks that occur with Cost-Plus Contracts
Although cost-plus contracts are generally favorable to contractors, they must recognize there are potential legal risks. Disputes and litigation can arise, such as allegations of breach of contract, fraud, and mechanic’s liens.
Breach of contract allegations occurs if the contractor or the property owner does not abide by the terms of the contract. Contractors and sub-contractors must keep meticulous records, as supporting documentation for their work. Contractors have a duty to provide detailed records and invoices to justify expenditures to property owners. A lack of organized and itemized records or confusion over records can result in a contractor or sub-contractor not being paid and the subsequent placement of a mechanic’s lien. An example of an allegation of fraud is the contractor’s inability to justify the actual expenditures or intentionally inflating costs. This situation can result in personal liability for the contractor.
How to Minimize Disputes
It is critical for a contractor to have a system in place to track expenditures. These include detailed invoices for building materials, supplies, labor hours, payroll, consultant fees, and others. It is necessary to maintain close supervision of a project, transparency, and sharing of audits and records with the property owner. These elements are vital to complete a successful transaction.
The Boutty Law Firm, P.A. offers a Free, Initial Consultation.
At The Boutty Law firm, P.A., we are dedicated to providing quality legal services for clients throughout Central Florida. We have vast experience in construction and business law, representing our clients’ best interests, with an impressive track record in state and federal courts. A construction project has a high degree of variability. Our law office can advise, negotiate, and draft the most favorable contract for your project. We establish contracts for property owners and construction professionals, with clear language and provisions for contingencies in unforeseeable circumstances. We provide comprehensive advice and support for project management, from the initial drafting of contracts through project completion and post-construction disputes and litigation.
Call The Boutty Law Firm, P.A., to represent all of your legal construction needs. We provide exceptional legal services for clients in Orange, Seminole, Osceola, and Volusia Counties in Florida. We look forward to discussing your construction projects and can be contacted at our Winter Park office at 407-622-1395 or 407-883-1024.