Not all construction projects are clear-cut. While projects like basic tenant improvements and office renovations can be more straightforward, builds like custom homes and historic renovations can be complex and unpredictable. And when expenses are unpredictable, a cost-plus contract can offer the flexibility contractors and clients need to navigate the project. Unlike fixed-price agreements, cost-plus contracts cover actual expenses plus a fee, which helps ensure transparency and fair compensation as the work unfolds.
In this article, we'll break down how they work, their pros and cons, and best practices for implementing cost-plus contracts.
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A cost-plus contract is a pricing agreement where the client agrees to pay the actual costs of a project plus an additional fee or percentage for the contractor's profit. It's ideal for projects with lots of unknowns and where parties need flexibility and transparency.
The core components of a cost-plus contract include:
The three main components above—direct costs, indirect costs, and profit margin—are the core of most cost-plus contracts. That said, there are a few optional components or clauses that may appear in more detailed agreements. These include:
There are different types of cost-plus contracts, each offering varying levels of control, risk, and reward for contractors and clients. Choosing the right type depends on your project scope, goals, and risk tolerance.
In this setup, the contractor is paid for project costs plus a predetermined fee, regardless of the final total cost. It offers budget predictability for the client while covering the contractor's overhead and profit.
Example: A homeowner building a custom house agrees to reimburse the contractor for costs and pay a $25,000 fixed fee for construction project management.
Here, the contractor's fee is calculated as a percentage of the total project costs. It's simple and flexible but can lead to rising costs if not monitored closely.
Example: For a kitchen renovation, the contractor charges the client for materials and labor, plus 15% of total costs as their fee.
This version rewards the contractor for keeping costs low or finishing ahead of schedule. It aligns both parties on efficiency and performance.
Example: A commercial build includes a $10,000 bonus if the contractor finishes under budget or within a tighter timeline.
What do cost-plus contracts look like in action? Here's how the process usually unfolds in projects.
Everything starts with a conversation. The general contractor and client define the project scope, outlining general expectations, timelines, and deliverables. While exact costs aren't known at this stage, the contract clearly defines how expenses will be tracked and how the contractor will be compensated—whether through a fixed fee, percentage of costs, or incentive.
Next comes a preliminary construction budget. The contractor provides a cost estimate of direct and indirect costs—materials, labor, equipment, and overhead. This isn't a final price but gives both parties a working framework.
This is also where a payment schedule is mapped out and tied to project milestones (e.g., foundation completed, framing done, etc.) or regular intervals like monthly billing.
As work begins, the contractor procures materials and manages crews to move the project forward. Throughout all this, they track and document costs and submit their invoices according to the agreed payment schedule. It's always best to include detailed documentation like receipts, timesheets, and subcontractor bills to maintain transparency and build trust.
Regular check-ins and cost reports are a must. Contractors keep clients in the loop with itemized updates showing progress against the budget. If the scope shifts or unexpected expenses arise, change orders are submitted, discussed, and approved before moving forward.
At the end of the project, the contractor delivers a final construction cost breakdown and supporting documentation. The client reviews the report, ensures all agreed-upon milestones are met, and submits the final payment.
Construction teams choose cost-plus contracts for projects where the scope may evolve or costs are difficult to predict upfront. Consider the following key advantages.
Cost-plus contracts can also have some drawbacks, particularly for projects that lack a clearly defined scope or firm budget expectations.
Cost-plus contracts work well when both parties value and promote transparency and collaboration. For best results, follow these tips to keep your finances organized.
In cost-plus agreements, every dollar counts, literally. That's why meticulous documentation is a must. Track direct and indirect costs in real time, and keep receipts, timesheets, and subcontractor invoices organized and accessible. The more detailed your records, the easier it is to justify costs and answer client questions quickly. This not only builds trust but also protects your business if disputes arise later.
Pro tip: Create templates for common documentation needs to save time and maintain consistency across projects.
Cost-plus contracts thrive on transparency, and that starts with consistent communication. Set up a cadence of progress updates—e.g., weekly emails, site meetings, or shared dashboards. Keep your client informed of completed milestones, upcoming work, and any unexpected expenses or scope changes. If you anticipate a budget shift, flag it early and explain why.
Regular updates help prevent misunderstandings and give your client confidence that their investment is being managed wisely.
Ensure that your contract spells everything out, including what counts as reimbursable, how fees are calculated, how often invoices are sent, and what happens if the project scope changes.
Clear terms protect both sides and reduce the risk of construction disputes. It's also smart to include language around audit rights, reporting formats, and any cost ceilings (like a guaranteed maximum price).
Managing cost-plus projects manually can be overwhelming. Tools like Autodesk Construction Cloud and GCPay can help you track expenses and generate invoices.
Set your sights on solutions that let you upload receipts, allocate costs to specific tasks, and set automatic reminders for billing cycles. With the right tech stack, you can reduce admin time, increase accuracy, and focus more on the work that matters: delivering a successful project.
Cost-plus contracts can be a smart move in projects that require flexibility and evolving scopes. Here's how they could play out in the real world.
Let's say a high-end residential builder was hired to construct a fully customized home in a remote area. Due to the site conditions and shifting design elements, the final scope couldn't be nailed down from the start.
Using a cost-plus fixed fee contract, the contractor was reimbursed for all labor, materials, and logistics, plus a $50,000 fixed management fee. This setup gave the homeowner full visibility into every cost and allowed the builder to adjust plans without the hassle of constant change orders.
Here's another hypothetical example: A commercial property owner brought in a contractor to restore a century-old building downtown. Unexpected issues—like structural weaknesses and outdated electrical systems—emerged during demolition.
A cost-plus percentage contract lets the contractor charge for actual expenses plus 18% for profit and overhead. This approach made it easier to navigate surprise costs and helped the owner avoid delays while staying aligned with preservation guidelines.
Cost-plus contracts aren't one-size-fits-all, but when used right, they keep complex projects moving forward. The key is clear communication, solid documentation, and the right tools to stay organized. Whether managing a renovation or breaking ground on something new, understanding how cost-plus contracts work can help you deliver better outcomes for everyone involved.
And if you're a GC looking for a solution that simplifies construction payments, GCPay's payment application software was built specifically for your needs. Learn more.
