A renovation contractor shared an interesting story with me last month. He bid a $400,000 lump sum on a restaurant buildout, then watched his profit evaporate when hidden conditions required an extra $80,000 in work.
On his next restaurant project — similar scope — he proposed cost plus. The final cost was $420,000. His profit? About $60,000. On the lump sum, he'd made $15,000 on a good day.
Cost plus contracts shift risk differently than fixed-price work. Understanding them can transform certain types of jobs from gambles into reliably profitable projects.
What Is a Cost Plus Contract?
A cost plus contract (also called cost reimbursement or time and materials with fee) means you're paid for your actual costs, plus an agreed-upon fee for overhead and profit.
The basic formula:
**Total Price = Actual Costs + Fee**
The "fee" can be structured different ways:
**Fixed Fee:** A set dollar amount, regardless of final costs.
**Percentage Fee:** A percentage of actual costs.
**Guaranteed Maximum Price (GMP):** Cost plus, but with a cap on total price.
When Cost Plus Makes Sense
Uncertain Scope
When the work can't be fully defined upfront — renovation, remodel, repair work where you don't know what you'll find until you start.
Design Development
When design is evolving during construction and changes are expected.
Emergency or Time-Sensitive Work
When there's no time for detailed estimating and bidding.
Trust Relationships
When the customer trusts you and is more concerned with getting quality work than with lowest price.
Highly Variable Work
Maintenance, repair, troubleshooting — work where requirements change constantly.
When Cost Plus Is Risky
Competitive Bidding
You'll often lose to fixed-price bidders who take on more risk.
Fixed Budgets
Customers who must know the exact cost upfront won't accept cost plus uncertainty.
Low-Trust Situations
Customers who'll question every cost and receipt create more administrative burden than the work is worth.
Simple, Defined Work
When scope is clear, fixed-price is usually cleaner for everyone.
Fee Structures Explained
Fixed Fee
You receive a set dollar amount — say $50,000 — regardless of actual costs. If costs are $400,000 or $600,000, your fee is still $50,000.
**Advantage:** You know your minimum earnings upfront.
**Disadvantage:** If costs run high due to scope expansion, your fee percentage effectively decreases.
Percentage Fee
You receive a percentage of costs — typically 10-20%. If costs are $500,000 at 15%, you get $75,000.
**Advantage:** You earn more on larger or more complex projects.
**Disadvantage:** Potential conflict of interest (higher costs = higher fee). Some customers don't like this.
Fee with GMP
Cost plus structure, but with a cap. If the GMP is $500,000 and actual costs are $450,000, savings can be shared.
**Advantage:** Customer has budget certainty; you have performance incentive.
**Disadvantage:** If costs exceed GMP due to scope creep, disputes arise.
Hybrid Structures
Some contracts combine elements:
What Counts as "Cost"
This is crucial — and often disputed. Your contract should clearly define reimbursable costs:
Typically Included
Sometimes Included
Typically NOT Included
Ambiguity in cost definitions leads to disputes. Be explicit.
Documentation Requirements
Cost plus contracts require rigorous documentation:
Labor Documentation
Material Documentation
Equipment Documentation
Subcontractor Documentation
Organization
Set up project-specific folders. All documentation should be organized, dated, and easy to review.
Billing on Cost Plus Projects
Frequency
Typically weekly or bi-weekly, more frequently than monthly progress billing on lump sum work.
Format
Invoice should show:
Approval Process
Customer may want to approve costs before payment. Build in reasonable review periods — 3-5 days is typical.
Disputes
When costs are questioned:
Protecting Yourself on Cost Plus
Clear Scope Definition
Even on cost plus, define the intended scope. This establishes expectations and makes it easier to identify when scope expands beyond original intent.
Written Change Recognition
When the customer adds scope, document it. "Per your request on [date], we're adding [scope]. This will increase costs by approximately [amount]."
Regular Reporting
Don't surprise the customer with large invoices. Provide weekly or bi-weekly cost reports so they see where the project is tracking.
Fee Protection
Make sure your fee is protected if scope is reduced. If you planned on a $50,000 fee for a $400,000 project, but scope drops to $200,000, you should still receive a reasonable fee.
GMP Protections
If you agree to a GMP, make sure change orders for additional scope increase the GMP accordingly. Never absorb scope additions under a fixed cap.
Customer Concerns and Responses
"You have no incentive to control costs."
Response: "My reputation depends on delivering value. I don't build a business by running up costs. And I'll provide regular cost reports so you always know where we stand."
"How do I know your costs are real?"
Response: "All costs are documented with receipts, time sheets, and supporting records. You can review everything."
"Can we cap the total cost?"
Response: "Yes, we can structure as cost plus with a guaranteed maximum price. This gives you budget certainty while allowing flexibility for field conditions."
"Why should I pay your overhead and profit on top of costs?"
Response: "The fee covers my company's overhead — office, vehicles, insurance, administration — plus reasonable profit for the risk and expertise I bring."
Using SubPaid for Cost Plus Projects
Digital tracking makes cost plus projects far easier:
SubPaid customers tell us cost plus projects that used to take 5 hours per week in administration now take 30 minutes.
Frequently Asked Questions
What's a typical fee percentage?
10-20% is common for subcontractors. Lower for very large projects or when working with trusted repeat customers. Higher for complex or risky work.
Can I lose money on cost plus?
If your fee doesn't cover your overhead and the project goes longer than expected, yes. Make sure your fee percentage or amount accounts for realistic project duration.
Who owns unused materials?
Typically the customer, since they paid for them. Clarify this in your contract.
What about materials ordered but never used?
Document them. If changes eliminated the need, the customer should pay for materials already purchased (possibly at reduced rate if you can return them).
Do I need different insurance for cost plus work?
Not usually. Your normal GL, workers comp, and auto cover cost plus work the same as fixed-price work.