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This is sometimes known as ‘cost plus’ or ‘all daywork’. The essence is that the
contractor is paid for all his direct inputs by way of labour, plant and materials at the
market prices which he pays, subject to definitions about such matters as labour
allowances, standing time of plant and discounts on materials. He is also paid
amounts for site and head office overheads and profit. These may be calculated as
lump amounts or percentages of the direct inputs; they are the ‘plus’ on the ‘cost’.
Elements of work within other financial bases may be reimbursed similarly, when the
term ‘daywork’ is used.
The approach is useful when the data or time for even approximate quantities is
lacking. This may happen with unpredictable alterations work or where other
overriding conditions of working are undefined. Cost control needs special attention,
as the contractor has no prima facie incentive to economise. Usually there are some
limited rights to control the extent of provision which the contractor is making on
site, most likely in terms of labour and plant.
The other main avenue of control is in the formula embodied for calculating the ‘plus’
or fee element. Broad structures are:
1. Variable percentage fee. One or more percentages are added to the prime cost
amounts, so that the fee varies with the total expended. It may be arranged on a
sliding scale, so that the percentage drops as the total increases. Here there is
no formula incentive to economy, but it is the only practicable method when
the extent of work is unknown.
2. Fixed fee. A lump sum fee is paid in addition to the prime cost. This puts some
pressure on the contractor to economise, as he receives a lower percentage
margin as his expenditure increases, eventually to the point where his profit
becomes negative. He still receives all of his prime cost whatever happens. The
method suits reasonably defined work.
3. Target cost. This takes various forms. In essence it requires an estimate of the
target cost of the works to be agreed before work begins and to be revised to
allow for variations, etc. A fee (established either on a lump sum or a
percentage basis) and a percentage addition for profit are also agreed in
advance. The actual cost of work, inclusive of the fee and overheads, is set
against the target and an adjustment is made for the difference. This may be by
sharing the amount between the parties, most usual if there is a saving, or the
whole being borne by the contractor, sometimes done if there is an overrun.
This requires the closest definition of work.
Prime cost contracting gives the greatest uncertainty for the client, but may be
inevitable. It may be questioned why the system should be used at all when an
estimate based on measurement (that is payment for output and not input) is valid to
control it. Some clients find that the system gives them better control of time in
particular and still good cost control, when using a reliable contractor. They may
secure this by continuous working from job to job, or by maintaining a shortlist of
firms and dropping poor performers.
As performance is the critical feature, negotiation is more often used than competition
to engage a contractor.
