Which type of construction contract addresses who is responsible for cost savings and overruns?

A cost-plus contract is designed to address the allocation of costs between the contractor and the client, making it clear who is responsible for any cost savings or overruns. In this type of agreement, the contractor is reimbursed for their allowable expenses as well as a fee that can be a fixed percentage of those costs or a fixed dollar amount. This structure means that if costs exceed expectations, the owner bears the burden, while if the contractor manages to save costs below the estimated amount, the contractor may benefit from a gain-share or incentive.

In contrast, a fixed-price contract sets a set amount that the contractor will be paid regardless of actual costs incurred, thus placing the risk for cost overruns entirely on the contractor. A time and materials contract involves payment for actual labor time and materials used, which may not clearly define responsibility for cost savings or overruns in the same way a cost-plus arrangement does. Lastly, a design-build contract focuses on integrating design and construction into a single contract but does not specifically address the cost savings and overruns in the same manner as a cost-plus contract.