Cost-plus contracts have a checkered history in the courts. The reason may be that judges find it strange that an owner would sign a construction contract where the contractor appears to have a blank check for its costs. As a result, the courts try to protect the owner from contractor overreach. On the other hand, contractors sometimes forget that they may be limited to a fixed fee, no matter how greatly the scope and cost of the work gets expanded. Some of these issues are in a previous article. (See “If You’ve Got the Money I’ve Got the Time,” from the September 2024 issue of ELECTRICAL CONTRACTOR.)

When considering the “blank check” issue, a question arises: What inducement is there for a contractor to try to get the best prices for materials and equipment for a cost-plus job? For example, why would a contractor negotiate with its suppliers to get a discount or keep an eye out for rebates if it gets no money for the effort? 

Suppliers sometimes offer a discount, called a cash discount, if the contractor pays the supplier’s invoice earlier than the purchase order requires. Why would a contractor make such an early payment on a cost-plus job if it gets no cash benefit? 

I have encountered a number of cost-plus contracts, and many of them try to address this “who gets the benefit of a discount” issue. 

In a widely-used cost-plus contract form, AIA A103 (2017), the drafters took a stab at including a clause about discounts. The resulting language requires effort to unscramble. The clause is in two parts. It reads as follows and is titled “Article 9, Discounts, Rebates and Refunds.” 

Cash discounts under AIA 

The first part of the clause is about cash discounts for early payment: “Cash discounts obtained on payments made by the Contractor shall accrue to the Owner if (1) before making the payment, the Contractor included the amount to be paid, less such discount, in an Application for Payment and received payment from the Owner, or (2) the Owner has deposited funds with the Contractor with which to make payments; otherwise, cash discounts shall accrue to the Contractor.” 

As you can see, this complex sentence only concerns cash discounts. It appears the “otherwise” portion of the clause allows the contractor to pocket the discount and bill the owner for the full amount of the supplier’s invoice unless the contractor showed the discount in a pay application. 

The justification for this language is unclear. The sentence that permits the contractor to bill the owner for amounts the contractor did not pay in full seems to contradict Article 12 of the AIA contract. Clause 12.1.5 states that pay applications may only be for “costs actually incurred.” It also seems to contradict Article 7 which states in Clause 7.1 that the contractor is only entitled to be paid for costs “necessarily incurred.” 

In short, if you are presented with this contract, some redrafting and clarifications will be needed.

The second part of Article 9

The second sentence reads: “Trade discounts, rebates, refunds, and amounts received from sales of surplus material, and equipment shall accrue to the Owner, and the Contractor shall make provisions so they can be obtained.”

This language provides that any discount or cash-back transaction in the purchase of supplies or equipment does not benefit the contractor. You may think that if you get no benefit, why make the effort to get these deals. Your answer is at the end of the sentence: “The Contractor shall make provisions so that they can be obtained.” 

This seems to say that if you do not try to get the discounts or cash back, you may be in breach of contract. As with the first part of Article 9, you may want to revise this language. After all, getting these cash back amounts will require some home office efforts, particularly getting money back for the sale of surplus materials and equipment. 

Conclusion

Article 9 has the appearance of the efforts of more than one drafter who may not have worked on other parts of the contract. No one wants to enter into a contract knowing there are ambiguous or vague clauses. If you are presented with this AIA contract or another cost-plus agreement, it would be worthwhile to review it carefully and pay attention to the discounts clause if you want to keep the money. 

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