111 Cost-Plus Contracts and Provisions

• Jurisdiction: Arizona

(a) Limitations of Costs

Even though the dollar amount may be set forth in an agreement, other circumstances may show that the agreement was intended to be a cost-plus agreement. Where a subcontractor has agreed to pay costs plus 10% to a contractor for completing the unfinished part of the subcontractor’s work, the amount of the subcontract will not be a limit on the amount to be recovered.

In Crone v. Amado, supra, a memorandum of agreement which included specifications and payment plan was entered into by the owner, the contractor, and the lender. It stated that there would be a total loan of $25,000, of which $8,700 was to pay mortgages, and the balance of the $25,000 was to be paid to the contractor, based on its costs plus 10%, on a weekly basis.

When the contractor incurred costs in excess of the funds remaining after payment of the mortgages, the owner refused payment, claiming that the agreement was a fixed price contract. The trial court ruled that the written memorandum did not limit the amount of reimbursable costs, and that the contractor was entitled to its costs plus 10%. The supreme court affirmed.

The following circumstances indicated that this was intended to be a cost-plus contract: (1) the owner constructed another building close by, using materials for this other building that the contractor had secured for the construction in question; (2) when the money provided for in the memorandum agreement first ran out, the owner told the contractor that he was refinancing, in an effort to convince the contractor to stay; (3) the specifications were not ready when the memorandum agreement was signed, so that it was unlikely that a contractor would have agreed to a fixed price; (4) the contractor had told the owner that no estimate could be made, other than a very approximate estimate of cost, because of fluctuating prices.

In Dale Benz, Inc., Contractors v. American Cas. Co., supra, the contract provided that in the event of breach by the subcontractor, the general contractor “shall provide the necessary material, labor, etc., to complete the contract in whole or in part and charge the cost thereof plus 10%” to the subcontractor. The Ninth Circuit Court of Appeals held that the amount of the subcontract would not be a limit on the amount chargeable to the subcontractor under this provision. However, this provision did not contemplate the inclusion of the general contractor’s overhead in the “cost” of finishing the subcontract. A majority of the court held, over a dissent, that the contractor was not entitled to add 10% to the cost of a subcontractor hired to...