What is a cost-plus contract?

TLDR

A cost-plus contract is a construction agreement where the client pays actual project costs plus a pre agreed markup, making it useful for projects with uncertain scope but requiring careful tracking and transparency.

Understanding cost-plus contracts in construction

If you are like most remodelers, renovators, trade contractors, or residential construction specialists, you are used to providing detailed construction estimates. These typically include materials, labor, equipment, and any other costs required to complete the job.

Occasionally, especially when working with engineers, architects, or project managers, you may be asked to work under a cost-plus contract. This type of agreement differs significantly from traditional fixed price estimating and can feel unfamiliar if you have not used it before. Understanding how cost-plus contracts work and when they are appropriate can help you decide if they are the right fit for a specific project.

How do cost-plus contracts work?

With a traditional construction estimate, you complete a full takeoff and provide your client with a fixed price before the project begins. A cost-plus contract works differently.

Instead of agreeing on a final price upfront, you and your client agree that they will pay for the actual cost of materials, labor, equipment, and other project expenses. On top of those costs, the client also pays a pre determined markup, which represents your overhead and profit.

In most cost-plus agreements, contractors provide hourly rates for different types of labor and equipment. These rates are used to calculate labor costs during progress billing and at project completion. For materials, it is standard practice to submit copies of supplier invoices to the client, along with the agreed markup applied.

Because pricing is based on real costs rather than projections, cost-plus contracts are typically more flexible but require a higher level of transparency.

When are cost-plus contracts a good idea?

If you are accustomed to fixed price estimates created manually or with construction estimating software, cost-plus contracts can initially feel uncomfortable. Sharing material invoices and relying on hourly rates is not how most residential projects are priced.

That said, there are situations where cost-plus contracts make sense, including:

• When the project scope or specifications are not fully defined and work needs to begin before plans are finalized
• When frequent changes are expected, eliminating the need to re estimate the entire project each time a decision changes
• When labor and equipment time is tracked accurately, making progress billing straightforward
• When the risk of underestimating labor time needs to be eliminated, since you are paid for actual hours worked

For complex or evolving projects, cost-plus contracts can reduce disputes and simplify change management.

What are the drawbacks of cost-plus contracts?

Cost-plus contracts are not without challenges. The biggest drawback is the level of record keeping required. Every material invoice must be saved, and every hour worked by each crew member must be tracked accurately.

Without strong systems in place, this administrative burden can quickly become overwhelming. Cost-plus contracts are also less common in residential construction, which means some homeowners may be unfamiliar or uncomfortable with the model.

For contractors, success with cost-plus agreements depends heavily on organization, transparency, and reliable cost tracking.

Using estimating software to support cost-plus work

Whether you work primarily with fixed price estimates or occasionally use cost-plus contracts, accurate cost data is critical. Modern construction estimating software like Bolster helps contractors track labor, materials, and pricing efficiently while maintaining consistency across projects.

By using up to date, location specific pricing and structured assemblies, you can ensure your cost tracking remains accurate and defensible. This is especially important when working under agreements that require detailed documentation and clear communication with clients.

Cost-plus contracts are not right for every project, but when used in the right situations and supported by strong estimating systems, they can be a practical and profitable option for construction professionals.