Michigan Residential Builders License Practice Test

What is true regarding a cost plus/fee contract in construction management?

1. The total construction costs are known to the owner

2. The contractor provides a target estimate

3. Payment of contractor fees can be oral

4. It does not require a written agreement

The correct answer is: The contractor provides a target estimate

In a cost plus/fee contract, the contractor is typically required to provide a target estimate for the overall project costs. This estimate serves as a guideline for both the owner and the contractor regarding expected expenses and allows the owner to have a clearer understanding of the financial scope of the project. The contractor is then compensated for the actual costs incurred during construction, in addition to a fee that can be a fixed amount, a percentage of costs, or another agreed-upon structure. The use of a target estimate in this type of contract facilitates better planning and budgeting for the owner, ensuring that the financial commitments align with their expectations, even though the exact costs may vary as the project progresses. Overall, the clarity of the target estimate is crucial for managing costs and project scope effectively in a cost plus/fee arrangement.