Cost-plus contract
A cost-plus contract is a construction contract in which the owner pays the contractor's actual costs of the work, plus a fee that covers overhead and profit. The fee is either a percentage of cost or a fixed amount.
Updated November 9, 2026 · 1 min read
Common types
- Cost plus a percentage: the fee grows with the cost.
- Cost plus a fixed fee: the fee is set up front and doesn't rise if costs do.
- Cost plus fee with a guaranteed maximum price (GMP): costs above the cap are the contractor's; savings below it are often shared.
Why it matters
It suits work that can't be priced up front, like a custom home whose finishes aren't chosen yet. The owner carries the cost risk and gets an open book; the contractor gets paid for every hour and every board. The catch is incentive: with a percentage fee, spending more earns more. The federal government bans that version outright: FAR 16.102 says "the cost-plus-a-percentage-of-cost system of contracting shall not be used."
Define "cost" carefully
Spell out what counts: labor and its burden, materials, equipment, permits, supervision, subcontracts. Then say what doesn't, such as home-office overhead, and how the owner can see invoices and time records.
If you send cost-plus agreements, upload yours once as a template and put an initials field beside the definition of cost, so the owner confirms that clause, not just the last page.
Questions? Answers.
Is cost-plus more expensive than a fixed price?
Not necessarily. A lump-sum bid includes a cushion for risk the contractor carries; cost-plus drops that cushion but leaves the owner exposed to overruns.
Sources
- Federal Acquisition Regulation 16.102, policies on contract types · acquisition.gov