Warner had sent me a reaction to I'Ashea's post concerning cost-plus contracts and I thought I would pass it along. Great dialogue and contribution. Thank you!
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This article is a response to compliment the excellent blog
article of the Division I Dispute
Resolver, written by I’Ashea Myles-Dihigo of the Leitner, Williams, Dooley
& Napolitan, PLLC firm in Nashville, Tennessee, “Cost-Plus Contract and the
Disorganized Contractor.” Ms.
Myles-Dihigo’s article in reference to Cost-Plus Contract project delivery and
a Contractor’s exposure as a result of inadequate cost record keeping and
accounting is on point. The article specifically references risk of non-payment
and non-entitlement in the event of inadequate cost records as support for
payment.
In addition to the article’s focus is the concept that:
there is no such thing as a cost-plus Contract. This is in the sense that the
Contractor thinks it can spend “whatever it costs” to execute a project, and
expect payment in kind – i.e. “Hey, it’s a Cost-Plus Contract…”
Typically, Cost-Plus engagements are often much sought after
and prized by Contractors due to the perception of a “softer” method of
procurement and delivery. This is a typical, but mistaken approach on the part
of some Contractors. They anticipate a project with less demand on
tight/controlled management, supervision, and efficient execution. This is
because there are not productivity targets necessary to achieve profitability
and virtually no risk of financial loss, since costs will be paid as expended –
efficient or not.
Nothing could be further from the truth.
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.
The author, Tony Manning, Vice President, Program and
Project Management Group at Warner Construction Consultants, Inc., may be
contacted at 301.670.9020 or tmanning@warnercon.com.
