Cost-Plus Contract

What is a Cost-Plus Contract?

A cost-plus contract (also called a cost-reimbursement contract) is an agreement where the client pays all actual costs incurred during a project plus an additional amount for the contractor's overhead and profit. This markup can be a fixed fee or a percentage of total costs.

Unlike fixed-price contracts where the contractor bears cost risk, cost-plus contracts shift most financial risk to the client while guaranteeing the contractor covers their expenses and earns a fair profit.

Types of Cost-Plus Contracts

Cost-Plus Fixed Fee

The contractor receives actual costs plus a predetermined dollar amount for profit. The fee stays the same regardless of final project costs.

Example: $50,000 project costs + $8,000 fixed fee = $58,000 total

Cost-Plus Percentage

The contractor receives actual costs plus a percentage markup. As costs increase, so does the contractor's profit.

Example: $50,000 project costs + 15% = $57,500 total

Cost-Plus with Guaranteed Maximum (GMP)

The contractor receives cost-plus compensation up to a maximum ceiling. Any costs above the GMP are the contractor's responsibility.

Example: Cost-plus 15% with $65,000 GMP. If costs hit $60,000, the client pays $65,000 maximum (not $69,000).

Cost-Plus with Incentive

Includes bonuses for completing under budget or ahead of schedule, or penalties for exceeding targets.

When to Use Cost-Plus

Ideal Situations

• Undefined Scope: When the full scope of work is unclear at project start
• Renovation Work: Where hidden conditions may be discovered
• Emergency Repairs: When speed is more important than price certainty
• High-Trust Relationships: With repeat clients who value transparency
• Design-Build: When design evolves during construction
• Complex Projects: Where estimating accurately is difficult

Less Ideal Situations

• Competitive Bidding: Most bid situations require fixed pricing
• Budget-Conscious Clients: Those who need price certainty
• Simple Projects: Where scope is well-defined and predictable
• First-Time Clients: Who may not trust open-book pricing

What Counts as "Costs"

Typically Included

• Labor: Wages, benefits, payroll taxes
• Materials: All job materials at actual cost
• Equipment: Rentals, fuel, maintenance
• Subcontractors: At their invoiced amounts
• Permits and Fees: All regulatory costs
• Job-Site Overhead: Dumpsters, toilets, temporary utilities

Typically in the Markup

• Office Overhead: Rent, utilities, admin staff
• Insurance: General liability, workers' comp
• Profit: The contractor's earnings
• Estimating and Management: Non-job-site time

Setting Your Markup

Industry Standards

• Small Residential: 15-25% markup is common
• Large Residential: 10-20% markup
• Commercial: 8-15% markup
• Fixed Fee: Often equivalent to 10-15% of estimated costs

Factors to Consider

• Project size and complexity
• Your overhead costs
• Local market rates
• Client relationship
• Risk level

Best Practices for Cost-Plus Projects

Document Everything

Keep detailed records of all costs including receipts, invoices, time sheets, and material lists. Transparency is the foundation of cost-plus trust.

Provide Regular Updates

Send weekly or bi-weekly cost reports so clients always know where the project stands. No surprises.

Define "Cost" Clearly

Specify in your contract exactly what qualifies as a reimbursable cost vs. what's covered by your markup.

Set Expectations Early

Discuss budget expectations upfront. Even without a fixed price, clients should understand the likely cost range.

Use Project Management Software

Track all costs digitally to maintain accurate records and generate professional cost reports for clients.

Cost-Plus Contract Template Essentials

Your cost-plus contract should include:

1. Definition of Costs: What expenses are reimbursable
2. Markup Structure: Percentage, fixed fee, or hybrid
3. Billing Schedule: How often you'll invoice (weekly, bi-weekly)
4. Documentation Requirements: What records you'll provide
5. Cost Ceiling (if applicable): Maximum project cost
6. Audit Rights: Client's ability to review records
7. Change Process: How scope changes are handled

Pros and Cons

Advantages

• Fair Compensation: You're paid for actual work performed
• Reduced Estimating Risk: No loss from underestimating
• Flexibility: Easy to adapt to scope changes
• Transparency: Builds trust through open-book pricing

Disadvantages

• Client Resistance: Many prefer price certainty
• Administrative Burden: Requires detailed record-keeping
• Less Incentive: No direct benefit from efficiency gains (unless incentive-based)
• Cash Flow: May need to front costs before reimbursement

The Bottom Line

Cost-plus contracts work best when both parties value transparency and flexibility over price certainty. They're particularly effective for renovation work, design-build projects, and trusted client relationships where open-book pricing strengthens rather than complicates the partnership.

The key to success is clear communication, meticulous documentation, and regular cost updates that keep clients informed throughout the project.