Cost-Plus
Understanding cost-plus contracts in construction. Learn the pros and cons of billing based on actual costs plus a percentage fee.
Calculation Formula
Invoiced Amount = Total Project Costs + (Total Project Costs × Fee %) Real Contractor Example
A contractor manages a complex renovation where the scope is undefined. They bill for all materials/labor ($80,000) and add a 15% management fee.
How Cost-Plus Works
In a cost-plus contract, the client pays the actual cost of labor, materials and subcontractors, plus a fee. The fee can be a percentage of costs or a fixed amount. It is used when the scope is unclear or likely to change.
In the example above, $80,000 of costs plus a 15% fee ($12,000) is an invoice of $92,000.
Making Cost-Plus Work for Both Sides
Define in writing which costs are reimbursable, keep receipts and open books, and consider a guaranteed maximum price or cap so the client has some certainty. A percentage fee rewards higher costs, so owners often prefer a fixed fee.
Remember that a 15% fee on cost is not a 15% margin. In the example, the $12,000 fee is about 13% of the $92,000 invoice.
Frequently Asked Questions
What is the difference between cost-plus and fixed price?
Fixed price sets the total in advance and the contractor carries the cost risk. Cost-plus bills actual costs plus a fee, so the client carries more of the cost risk and expects transparency.
Which costs can be billed on a cost-plus job?
Only the costs the contract defines as reimbursable, usually direct labor, materials, subcontractors and sometimes specific job expenses. Spell this out before work begins.
What is a guaranteed maximum price?
It is a cap on the total the client will pay on a cost-plus contract. The contractor bills actual costs plus the fee, but not above the agreed maximum unless the scope changes.
Related terms
Put This Into Practice
Knowing the definition is step one. RemodelFin tracks this in real time on every job — no spreadsheets.