A cost-plus contract pays a contractor for their actual documented costs, materials and labor, plus an agreed fee or percentage on top as profit.
Owners and contractors use this structure on projects where scope isn’t fully defined up front.
What Does a Cost-Plus Contract Typically Include?
- Reimbursement for documented material and labor costs
- An agreed fee or percentage markup
- Open-book cost reporting
- Flexibility for design changes mid-project
Why Are Cost-Plus Contracts Important?
A custom home with evolving design decisions might use a cost-plus contract so the owner can make changes without renegotiating a fixed price each time. The tradeoff is that owners need to trust the contractor’s cost reporting, since there’s less built-in incentive to control costs compared to a fixed-price contract.
Cost-Plus Contract vs. Fixed-Price Contract
A fixed-price contract sets one total price regardless of actual costs, shifting risk to the contractor. A cost-plus contract shifts that risk toward the owner in exchange for more flexibility to make changes as the project evolves.