Cost Plus
A pricing structure where the owner reimburses the contractor for actual costs plus an agreed fee, with no fixed total price.
Definition
A cost-plus contract reimburses the contractor for actual project costs plus an agreed fee for overhead and profit. There is no fixed total price upfront; instead the contractor opens their books to the owner and is paid for what the project actually costs to build, plus a markup.
Cost-plus arrangements come in several flavors: cost plus a fixed fee (a flat dollar amount), cost plus a percentage fee (a percentage of total cost), and cost plus with a guaranteed maximum price (GMP) that caps the owner’s exposure.
How cost plus is used in estimating
In estimating, a cost-plus job is priced very differently from lump sum. The estimator still produces a takeoff and budget, but the budget is informational rather than contractual. The actual contract document is the cost-reimbursement agreement, the fee structure, and any GMP cap. Estimators on cost-plus jobs pay close attention to how costs will be tracked, what counts as a reimbursable cost, and what is included in the fee.
Cost-plus is common on negotiated work, fast-track projects, complex renovations, and any job where the scope cannot be defined precisely enough for a fair lump-sum bid. It is also common on private residential custom homes where the design evolves continuously. The trade-off is that the owner takes on cost risk in exchange for transparency, while the contractor accepts a thinner margin (the fee) but no risk of cost overruns inside their scope.
Common cost-plus mistakes
A common owner mistake is failing to define what is reimbursable. Vague language around "cost of the work" leads to disputes over whether home-office overhead, training time, or general conditions are reimbursable or part of the fee. A common contractor mistake is failing to document costs rigorously — without auditable invoices, time sheets, and purchase orders, the owner can challenge reimbursement and slow payment. Both sides should agree on a clear cost code structure and reporting cadence before mobilization.
Frequently asked questions
Q.What is the difference between cost plus and time and materials?
Time and materials reimburses for labor hours at billing rates and materials at cost plus markup, with no separate fee. Cost plus reimburses actual costs (including burdened labor, materials, and equipment) and adds an explicit fee on top.
Q.What is a GMP in cost-plus contracts?
A guaranteed maximum price (GMP) caps the owner’s exposure on a cost-plus job. The contractor is reimbursed for actual costs plus a fee, but the total cannot exceed the GMP. Savings below the GMP are typically shared between owner and contractor.
Q.When should an owner use cost plus?
When the design is incomplete, the scope will evolve, or the project requires a trusted partner more than a low bid. Custom residential, complex renovations, and fast-track projects are typical cost-plus candidates.
Q.Is cost plus more expensive than lump sum?
It depends on how the project unfolds. A clean lump-sum job with no changes is usually cheaper, because the owner pays a smaller risk premium. On a project with constant scope changes, cost plus can be cheaper because there are no change-order markups stacked on top.
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