A cost plus agreement, also known as a cost reimbursement or cost-plus contract, involves a method of pricing in which a seller agrees to be reimbursed for all costs incurred during the construction or manufacturing process, plus a predetermined profit margin. This type of agreement is often used in complex construction projects, where the project’s total cost is difficult to estimate. A cost plus agreement is also used in manufacturing contracts, where the vendor is paid for their manufacturing and overhead costs, plus a percentage of profit.
A cost plus agreement typically consists of two components: the costs incurred by the seller (the cost element) and the amount that the seller will receive as profit (the plus element). The cost element includes costs such as direct labor, materials, and subcontractor costs for the project. The plus element is the percentage of profit that the buyer agrees to pay the seller.
Here is a sample cost plus agreement that can be used as a reference when drafting a similar contract:
[City, State ZIP Code]
This Cost-Plus Agreement (“Agreement”) is entered into on [Insert Date] by and between [Company Name] (“Seller”) and [Buyer Name] (“Buyer”).
1. Scope of Work
Seller agrees to perform the following work:
[Insert Scope of Work]
2. Cost-Plus Pricing
The price for the work performed under this Agreement shall be calculated as follows:
2.1 Cost Element
The cost element for the work performed under this Agreement shall consist of all direct and indirect costs incurred by Seller in connection with the work, including but not limited to:
(a) Direct labor costs, including wages, salaries, and benefits of Seller’s employees directly involved with the work;
(b) Materials costs, including raw materials, supplies, and equipment purchased or rented specifically for the work;
(c) Subcontractor costs, including labor, materials, and equipment provided by third-party contractors for the work;
(d) Overhead costs, including rent, utilities, insurance, and other general and administrative expenses directly attributable to the work.
2.2 Plus Element
The plus element for the work performed under this Agreement shall be [Insert Percentage] of the total cost element.
Buyer agrees to pay Seller the price for the work performed under this Agreement in accordance with the following payment schedule:
[Insert Payment Schedule]
Any changes to the scope of work or the price for the work shall be made in writing and signed by both parties.
5. Term and Termination
The term of this Agreement shall begin on the date first written above and continue until the work is completed. Either party may terminate this Agreement upon written notice to the other party if the other party breaches any material provision of this Agreement.
6. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the State of [Insert State].
7. Entire Agreement
This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the work to be performed under this Agreement.
In witness whereof, the parties have executed this Agreement as of the date first written above.
[Company Name] [Buyer Name]
In conclusion, a cost plus agreement is a suitable pricing model for complex construction and manufacturing projects when the total cost estimation is uncertain. It is essential to draft a contract that clearly defines the scope of work, cost-plus pricing, payment terms, and other essential clauses. The sample cost plus agreement provides an example that can be used as a reference when drafting a similar contract.