A cost plus pricing strategy involves setting the price at the production cost plus a certain profit margin.

Needless to say if the production cost is 100 pounds and the desired profit margin is 25% then the price the product needs to be sold would be 125 pounds. However the Building construction industry has seldom used this cost plus pricing strategy for various reasons, mainly due to the fact that its nearly impossible to know the exact end cost of a building at the start of the project. So it would only make sense to charge the end consumer a higher price. Basically the end consumer pays the price for this unknown risk. The Myth about Fixed Cost Contracts in Construction: In actual fact, allowances in a fixed price contract are really just mini cost plus contracts within the fixed price contract ie a Fixed Cost Contract is nothing but a Cost Plus Contract with additional allowances for risks/uncertainity Fixed Cost = Likely Construction Cost + Profit Margin + Cost of Risk/uncertainty But, Cost Plus = Construction Cost + Profit Margin Therefore, Fixed Cost = Cost Plus + Cost of Risk/Uncertainty Thus we see that a fixed cost Contract is essentially a Cost Plus contract with an additional allowance for the cost of risk/uncertainty But as mentioned earlier, due to inherent drawbacks, its impossible to know the exact cost of construction. However by using knowledge management analysis, we can try to minimise the cost of risk/uncertainty, and at a point where the cost of risk is zero, Thus, Fixed Cost = Cost Plus In most cases the cost of risk/uncertainty has to be borne by the end consumer. Through this Business Development Plan I propose, ..............................................................................................................................................

Explanation: As explained earlier a real estate company does not know the actual cost of constructing a building. Needless to say it does not know the cost per flat. It arrives at the final price with reference to previous projects, moreover it tends to quote at a profit margin of 75% to minimise its exposure to risk. Stage A involves signing of the contract between the customer and the real estate company for a flat at a fixed cost. The real estate company goes into a contract with a Main Construction Contractor. This contract could be a Fixed Cost (Lumpsum) contract, or Item-rate contract, etc. The main contractor in turn gets the work done through subcontractors and specialists. Herein lies the big bubble. The more closer you move towards the

chain viz. supplier and the specialists, the costs tend to be more precise, since the quantity, rate and specifications are clear at this stage.

And at each stage there is a profit margin involved. Assume that the actual cost of construction is 100 pounds. 20% Subcontractor Profit = 120 pounds 20% Main Contractor Profit = 144 Pounds 75% Real estate Profit = 252 Pounds (The real estate company profit includes the uncertainty risk) Factors that go against a Cost Plus Contract: Cost of an Item: