- “LENDER REQUIREMENTS: Lender attitudes to cost plus contracts vary significantly by financier, loan type, and project characteristics. The article describes general principles that apply across most project finance contexts. Before publication, confirm with Trent/Mitch/Steven that the description of lender concerns and GMP acceptance reflects their experience in the QLD commercial market. Do not treat the lender section as citing specific bank policies.”
- “GMP UNDER AUSTRALIAN CONTRACTS: The GMP mechanism described is accurate as a contractual principle but is not specifically encoded in AS 4000-1997 as a standard contract type. GMP contracts are typically drafted as bespoke arrangements or modifications to the standard form. The article notes this. Verify with VelpasConn’s experience of how GMP is typically documented in the QLD market.”
- “AS 4903 REFERENCE: AS 4903-2000 is the Australian standard for Design and Construct contracts. It is referenced as context for contract framework discussion. Confirm this is still the relevant standard form in use (some jurisdictions have moved to other forms).”
- “TARGET COST: Target cost contracts are real but less common in Australian mid-market commercial than lump sum or cost plus GMP. The description is accurate in principle. Flag if VelpasConn has direct experience with target cost arrangements to substantiate with a real example.”
- “SOPA/BIF ACT: Payment claim references use the QLD framework (Building Industry Fairness (Security of Payment) Act 2017). This is accurate for Queensland. If the article is intended for a national audience, note that the framework varies by state.”
Cost Plus Doesn’t Mean Blank Cheque: Making Open-Book Work With Your Lender
A developer has land, a brief, and an architect four months into schematic design. The documentation won’t be complete for another five months. The development approval came through last week. The window to start on site is now: if the project waits for full documentation, the programme blows by six months and the financing is under pressure from a different direction.
The builder has proposed a cost plus arrangement. Start the early works now, build out as the design is completed, pay actuals as they come. It is the most logical procurement approach for a project where the design is not ready for a fixed-price tender.
The developer calls the financier. The financier hears “cost plus” and the conversation immediately becomes uncomfortable.
This is a familiar dynamic. Cost plus has a trust problem with lenders, most of it earned through projects that used the mechanism without proper structure. But cost plus done properly is more transparent than a lump sum contract. The problem is rarely the mechanism. It is how badly it can be structured.
The Four Contract Types
Understanding why lenders react the way they do to cost plus requires understanding what it is being compared to.
Lump sum (fixed price) is the standard commercial construction contract in Australia. The contractor agrees to deliver the defined scope for an agreed price. Under AS 4000-1997, the contractor carries the risk of most cost overruns except for legitimate variations or principal-caused events. The client’s maximum exposure is the contract sum plus agreed variations. The lender’s maximum exposure is the same. Cost certainty is as high as it gets on a construction contract.
The limitation of lump sum is that it requires complete documentation before you can price it. Incomplete documentation means the contractor prices their risk into the contract sum, or the variation register grows throughout the project as design gaps surface. Neither is cost certainty. It is the appearance of cost certainty.
Cost plus (time and materials) is a contract where the client pays the contractor’s actual costs plus a margin for overhead and profit. There is no agreed maximum cost. If the project is complex, or the scope is uncertain, or the design is incomplete, this represents a genuine open-ended financial commitment. This is what lenders are nervous about.
Cost plus with a Guaranteed Maximum Price (GMP) is cost plus with a ceiling. The contractor agrees to deliver the project for actual costs plus margin, with a contractual maximum that cannot be exceeded except for agreed defined events. If the actual cost comes in below the GMP, the client pays the actual cost. If it threatens to exceed the GMP, the contractor absorbs the excess. The GMP is the ceiling. The client cannot pay more.
Target cost is a refinement of cost plus where an agreed target price represents the expected project cost. If the final cost comes in below target, the saving is shared between client and contractor by a pre-agreed formula. If it comes in above target, the additional cost is also shared. Both parties have skin in the outcome.
Why Lenders Are Nervous (And When They’re Right)
The lender’s concern with cost plus comes down to this: they have underwritten a loan against a project with a known cost. If that cost is uncapped, the loan-to-value ratio can change as construction progresses. The security the lender holds against the loan is the completed project. If the construction cost escalates, the project may not be able to service the debt it was underwritten against.
This is a reasonable concern. It is also a concern that applies most acutely to uncapped cost plus, which is not the same as cost plus GMP. The lender’s fear of cost plus is often a fear of uncapped exposure. When the GMP is in place and the structure is correct, the lender’s maximum cost exposure is known from the date the GMP is agreed.
The reasons lenders have legitimate concerns about any open-book contract include:
The GMP may not be agreed at the right time. A GMP agreed before design is advanced enough to properly scope the project can be set too low, forcing the contractor into cost recovery claims, or too high, providing no meaningful protection against overrun. A GMP set at schematic design carries more risk than a GMP set at 90% documentation.
The GMP exclusions matter. A GMP contract that excludes provisional sums, client-directed variations, and specified risk items is not the same as a fixed-price contract. What sits inside the GMP and what sits outside it determines how meaningful the ceiling is.
I’ve seen GMP contracts where the exclusion schedule ran to two pages. Provisional sums covered every uncertain element. By the time final costs were tallied, the client had paid above what a properly scoped lump sum would have been.
The open-book process requires active management. Cost plus only delivers the transparency it promises if someone is actually reviewing the cost records. A cost plus project where the monthly invoices aren’t genuinely reviewed is not more transparent than a lump sum project. It is just more paperwork.
How GMP Works in Practice
A GMP contract is structured as cost plus with an agreed maximum. The mechanism under Australian construction law is typically implemented as a bespoke arrangement or a modification to a standard form contract — it isn’t a defined contract type under AS 4000-1997, though the standard form provides a reasonable foundation for the modification.
The GMP is set at a point when the design is developed enough to give the contractor and the cost advisor confidence that the number is buildable within the ceiling. Setting a GMP at schematic design (20-30% design development) is possible but carries risk. Setting it at 50-70% documentation is more defensible. Setting it at near-complete documentation approaches the cost certainty of a lump sum tender.
The GMP contract should specify:
- What is included in the GMP (the defined scope at the date of agreement)
- What will cause the GMP to be adjusted (principal-directed variations, changes in the approved design, events beyond both parties’ control)
- What audit rights the client has over the contractor’s actual costs
- How the saving is shared if actual cost comes in below the GMP
A GMP where the adjustment clause is wide enough to capture most foreseeable events isn’t a GMP. It is cost plus with a ceiling that has so many escape hatches it doesn’t provide a ceiling. The robustness of the GMP depends on the precision of what sits inside it.
Target Cost: The Partnership Model
Target cost contracts sit between cost plus and lump sum. An agreed target represents the expected project cost. If the project comes in below target, the saving is shared between client and contractor — for example, 70% to the client, 30% to the contractor. If it runs over, the additional cost is also shared. Both parties have skin in the outcome.
The mechanism avoids the adversarial dynamic of a lump sum where variations are the contractor’s primary tool for recovering margin. Under a target cost arrangement, the contractor makes more money by finding efficiencies. The incentive structure is different.
For a financier, target cost with a defined maximum contractor liability can provide similar comfort to a GMP. The key is defining where the contractor’s liability caps and the client’s exposure takes over.
Open Book: What the Client Actually Gets
Open-book procurement means the client (and their advisors) have the right to review the contractor’s actual project costs. This includes subcontract packages, direct labour records, plant and equipment costs, and supplier invoices.
The right to review costs is only useful if someone exercises it. Open book without active cost management by the client’s quantity surveyor is transparency on paper. The cost records exist, but nobody has checked whether the contractor is booking costs at market rates, whether the plant charges reflect actual site usage, or whether the preliminary costs are consistent with the agreed scope.
I’ve been on cost plus projects where the open-book reporting was in the contract but the review cadence was too slow to catch cost patterns before they embedded. By the time the QS ran the reconciliation, several months of invoices needed to be unwound. The open-book right was real. The oversight wasn’t.
A functioning open-book process includes regular cost reviews by an independent QS against the budget and subcontract packages, pre-agreed rates for direct labour and plant, and a cost reporting format that can be reconciled against actual invoices.
Open book is a higher administrative burden than a lump sum. It requires investment in cost management. The return is the visibility to identify cost issues before they become problems, rather than reading about them in the final claim.
Independent QS Verification: The Critical Control
The client’s quantity surveyor is the key control mechanism in any cost plus or GMP arrangement. The QS acts as an independent check on the contractor’s costs, provides an independent assessment of the GMP at the time it is set, and monitors cost performance throughout the project.
For a lender considering a cost plus or GMP arrangement, the appointment of an independent QS isn’t optional. It is the mechanism that provides the cost oversight the lender’s due diligence requires. A lender relying solely on the contractor’s cost reporting isn’t doing project finance. They are providing a loan based on the contractor’s self-assessment of their own costs.
The independent QS advises on the GMP level before it is set, certifies that progress claims are supported by cost records, reports independently to the lender on GMP exposure throughout the project, and confirms the final claim. The lender should be receiving independent cost reports, not just the contractor’s cost summary.
Milestone Drawdowns: Aligning Payment With Progress
Project financing typically involves drawdowns: the lender releases funds as construction reaches defined milestones. This structure protects the lender by ensuring that funds are only released when the corresponding work has been completed and certified.
Under a lump sum contract, milestone drawdowns are simpler to structure: the QS certifies that the work to date represents the claimed percentage of the contract sum, and the drawdown is released.
Under a cost plus or GMP contract, milestone drawdowns require more structure because there is no fixed contract sum to measure against. The drawdown milestones need to be defined in terms of construction completion (physical progress) and cost (actual costs to date). The QS certifies both.
For lenders, the practical requirements include drawdown milestones tied to defined construction milestones (not just elapsed time), independent QS certification of costs against work completed, regular reporting on GMP exposure and forecast cost to complete, and a drawdown facility that caps at the GMP. The GMP is the ceiling. The drawdown facility should reflect that.
When Cost Plus Is the Right Choice
Cost plus is the right procurement approach when a fixed-price contract would either be undeliverable or would produce a price that doesn’t reflect the actual project.
Situations where cost plus typically makes sense:
The design is incomplete. A lump sum tender against incomplete documentation is not a fixed price. It is a fixed price for the defined scope plus a variable for everything that isn’t yet defined. Cost plus with GMP on a partially designed project is more honest about the risk allocation.
Early works overlap with design development. Enabling works, demolition, or long-lead procurement can begin before documentation is complete, without forcing an artificial division into separate contracts.
The scope is genuinely uncertain. Refurbishment work, heritage buildings, and complex live environments have scope risk that is difficult to quantify at tender. A lump sum price for work with high scope uncertainty will carry a large contractor contingency. Cost plus makes that contingency visible.
Cost plus is the wrong choice when:
The documentation is complete and the scope is clear. A lump sum tender against a complete documentation set is more competitive and provides genuine cost certainty.
The client doesn’t have the capacity to manage an open-book process. Cost plus requires active cost management. A client without an experienced QS or project cost manager isn’t positioned to get the benefit of the transparency cost plus provides.
The Practical Takeaway
Cost plus is a mechanism that suits certain projects and doesn’t suit others. The lender’s caution about it is justified when the structure is wrong. It is much less justified when the GMP is set correctly, the open-book process is active, the independent QS is appointed and functioning, and the drawdown structure reflects the risk.
The conversation to have with a financier is not “trust us, it’s cost plus.” It is: here is the GMP, here is the QS appointment, here is the drawdown structure, and here is how we will report to you through the project. Those answers either satisfy a reasonable lender or they don’t. A lender who won’t fund a well-structured GMP project is applying fixed-price criteria to a project that doesn’t suit fixed-price procurement. That is a separate conversation.
The blank cheque version of cost plus is real. So is the tightly managed, open-book, GMP version.
They are not the same thing.
VelpasConn has experience across both fixed-price and cost plus procurement. Where early contractor involvement suits the project brief, we can structure the engagement to meet lender requirements including GMP, open-book, and independent QS access.