The Cost+ model

Traditional construction contracts based on fixed pricing and strict risk allocation tend to be relatively prone to conflict. While the client has an interest in the work being carried out in accordance with agreed (quality) requirements and timelines and at the agreed fixed contract sum, the contractor is primarily incentivised to minimise costs and maximise return.

These conflicting interests may give rise to tensions during the execution of the project and are a common source of disputes. In addition to addressing pricing challenges, the Cost+ model aims to prevent such disputes by better aligning the parties.

Under the Cost+ model, the contractor’s actual and demonstrative costs are reimbursed, subject to specific exclusions exhaustively listed in the Cost+ agreement. Reimbursement is based on a pre-agreed target price, combined with a financial incentive mechanism.

This mechanism encourages both parties to complete the works on time and at the lowest possible cost. A provisional settlement usually takes place upon completion of the works, with a final settlement after the maintenance period (if agreed).

The total costs are determined and paid according to the 'open-book principle’. This gives the client the right to inspect and audit the contractor's project administration. Any incorrectly reimbursed costs may be corrected.

The 'target price'

The target price is the central reference point for costs settlement within the Cost+ model. If actual costs remain below the target price, the contractor's return increases. If costs exceed it, the contractor’s return decreases.

The target price is typically based on a detailed estimate of expected costs per activity. The client's budget is adjusted accordingly. The target price may be determined in advance by the client, based on the contractor's offer or agreed jointly by the parties.

The target price may be increased where additional costs are wholly attributable to the client, such as failure to make the construction site available on time. It may be reduced where changes lead to cost savings, for example replacing triple glazing with double glazing.

Deviations that do not add value, such as an obstacle that obstructs drainage and causes delays, do not in principle justify an adjustment of the target price. An exception applies when the underlying cause already entitles the contractor to an increase in the target price. The participation mechanism is intended to encourage both parties to limit delays.

Within the target price, a 'risk provision' item may be included for identified components. This provision may be drawn upon if the relevant risk materialises. Even where actual costs exceed the agreed provision, they are reimbursed in full. In such cases, the target price does not require adjustment. The fundamental principle remains that actual costs are always reimbursed.

What is the 'profit'?

Under the Cost+ model, the contractor’s profit is determined by the difference between the actual costs and the target price. This difference forms the basis of the bonus/malus (pain/gain) mechanism.

If the actual costs remain below the target price, the resulting saving is shared between the client and the contractor. If costs exceed the target price, the overrun is also shared, reducing the contractor's return.

The contractor’s final profit depends not only on the costs incurred, but also on:

  • the agreed percentage for sharing overruns and underruns;
  • any caps on maximum gain or loss; and
  • adjustments to the target price following material project changes.

This system offers two important advantages:

  1. The contractor is strongly incentivised to control costs, as overruns directly affect profit.
  2. The contractor does not need to price in speculative risks, as actual costs are reimbursed in any case. This provides greater certainty at the outset.

As a result, both parties share an interest in meeting the time schedule and controlling costs. This significantly reduces the likelihood of disputes and makes the model particularly suitable for complex or high-risk projects. 

Advantages of the Cost+ model

  • Transparency and cooperation: The open-book principle and shared financial interests promote collaboration and reduce cost-related disputes.
  • Reduced risk for contractors: Contractors do not need to factor hypothetical risks into their pricing, which may lead to faster contract formation.
  • Incentive for cost control: The bonus/malus system encourages both parties to limit costs and delays.
  • Flexibility for public authorities: In tenders, the model allows for more realistic bids, enhancing competition and quality.

Disadvantages of the Cost+ model

  • Uncertainty of total cost: Unlike fixed-price contracts, the final cost is not known in advance, which may be undesirable for some clients.
  • Less attractive to financiers and investors: Funders often require cost certainty. The intensive cooperation required by the model may also exceed organisational capability.
  • Dependence on effective communication: Timely information exchange is essential. If the contractor does not report circumstances, additional costs will not be reimbursed (except where unavoidable).

Conclusion

The Cost+ model is not suitable for every construction project. However, it can offer an effective solution for complex, large-scale and high-risk construction projects.

By combining transparent cost allocation with shared financial incentives, the model aligns the interests of client and contractor. The open-book principle and its audit rights provide control and reassurance for the client, while reimbursement of actual costs reduces uncertainty for the contractor. This promotes cooperation, limits discussions about unexpected costs and makes innovative and risky projects more feasible.

The Cost+ model is not the only relatively new approach to managing construction risks and costs. We have previously written about two-phase agreements, which are used in complex and long-term construction projects.

Contact

Would you like to know more about the Cost+ model or which contractual structure best suits your project? Please feel free to contact us. Our specialist construction law team will be happy to assist.