What Is a Cost-Plus Contract?

You’re a construction project manager facing a complex renovation where hidden structural issues could dramatically change your scope of work. You analyze the existing framework and realize adjustments are needed to ensure safety and building code compliance. 

In other words, more time and money are out of the scope of this project. In this scenario, a cost-plus contract is your best ally because it’s flexible in addressing unforeseen expenses and changes in project requirements. 

A cost-plus contract is a pricing agreement where the contractor is reimbursed for all direct project costs (materials, labor, and equipment) plus an additional agreed-upon fee or percentage for overhead and profit. This contract type is particularly valuable in construction and engineering projects where the full scope of work isn’t easily determined upfront.

Continue reading to learn everything you need to know about cost-plus contracts: how they work, their different types, key advantages and disadvantages, and how they compare to other contract types. We’ll even show you how to automate contract creation so you don’t have to do it manually every time.

How Do Cost-Plus Contracts Work In Construction Projects?

Think of a cost-plus contract as a transparent partnership where every dollar spent is accounted for. Unlike traditional contracts, where contractors may need to pad their estimates to cover uncertainties, cost-plus contracts lay everything bare on the table.

Here’s how the dollars and cents break down:

Direct Costs

• Materials: Every nail, beam, and brick
• Labor: Wages for workers on site
• Equipment: From heavy machinery rentals to small tool purchases
• Subcontractor fees: Any specialized work needed

Indirect Costs

• Project management and supervision
• Office overhead
• Insurance and bonds
• Administrative expenses

The “plus” part? That’s where the contractor’s profit comes in, typically structured as either a fixed fee or a percentage of the total costs. Following our contract creation guide, you can ensure all these elements are properly documented.

Managing the Money Flow 

Throughout the project, contractors submit detailed documentation for all expenses, usually including:

• Weekly or monthly cost reports
• Original receipts and invoices
• Time sheets for labor
• Equipment usage logs

Project Owner’s Perspective

Here’s how a project owner can benefit from a cost-plus contract:

• Real-time visibility into all project costs
• Right to audit expenses
• Ability to make informed decisions about changes
• Need for careful budget monitoring

Contractor’s Perspective

And here are the benefits of a cost-plus contract for contractors:

• Reduced financial risk
• Guaranteed profit margin
• Higher administrative burden
• Need for meticulous record-keeping

Trust and transparency is what makes cost-plus contracts a success. Both parties must maintain open communication and detailed documentation throughout the project lifecycle.

The Different Types Of Cost-Plus Contracts

So, you want to use a cost-plus contract for your construction contract management. But there’s more than one type — which should you choose? Let’s break down each to see which matches the needs of your next project.

Cost-Plus Fixed Fee (CPFF)

With a cost-plus fixed fee contract, the contractor gets reimbursed for costs plus a predetermined flat fee. Simple and straightforward.

For example, let’s say you have a $1M renovation project with a fixed fee of $100,000. Even if costs rise to $1.2M, the contractor’s fee remains $100,000.

This type of contract is best for projects with well-defined scopes but uncertain costs, like historical building renovations.

Cost-Plus Incentive Fee (CPIF)

The cost-plus incentive fee contract combines cost reimbursement with performance-based incentives. In other words, the better the contractor performs, the higher the fee.

For instance, a contractor who completes a project under budget gets to keep 50% of the savings, creating motivation for cost efficiency.

CPIF is best for complex projects where innovation and efficiency matter, like green building initiatives.

Cost-Plus Award Fee (CPAF)

A cost-plus award fee contract is similar to CPIF, but with subjective performance criteria. The difference: fees are awarded based on periodic evaluations.

For example, a contractor earns additional fees for exceptional safety records, quality metrics, or timeline adherence.

This makes CPAF best for government contracts or projects with multiple success metrics beyond just cost.

Cost-Plus Percentage of Cost (CPPC)

In a cost-plus percentage of cost contract, the contractor’s fee is a percentage of the total costs. Warning: This type is actually illegal in many public contracts due to potential abuse.

It works like this: A 15% fee on all costs means higher project costs = higher contractor profits. See the problem?

Because of this, CPPC is rarely recommended due to misaligned incentives, but is sometimes used in emergency situations.

Pro Tip: When selecting a cost-plus contract, make sure it aligns contractor incentives with project goals. Match the contract type to your project’s priorities: cost control, performance, or flexibility.

The Advantages Of A Cost-Plus Contract

When implemented correctly, construction contract agreements can create win-win scenarios for both project managers and contractors. Let’s explore the key benefits that make cost-plus contracts particularly attractive.

Flexibility in Design & Requirements

Cost-plus contracts shine when project scope needs room to breathe. Take a historical building renovation — you may discover original architectural features worth preserving only after work begins. With a cost-plus contract, you can:

• Adjust specifications on the fly
• Add or modify design elements
• Incorporate unexpected discoveries
• Respond to changing market conditions

Key takeaway: Cost-plus contracts let you adapt to reality instead of being locked into initial assumptions.

Reduced Contractor Risk

Contractors can focus on quality execution rather than padding estimates to cover uncertainties. Real-world example: A contractor discovering asbestos during demolition can immediately address the issue without lengthy change order negotiations. 

Other benefits include:

• Direct reimbursement for unexpected costs
• No need to inflate initial bids
• Protection against material price fluctuations
• Clear documentation of all expenses

Key takeaway: Lower risk means more competitive initial pricing and fewer disputes.

Encourages Project Collaboration

Unlike fixed-price contracts that can create adversarial relationships, cost-plus arrangements promote teamwork. 

Here’s how it plays out in practice:

• Open discussions about cost-saving opportunities
• Shared problem-solving when issues arise
• Transparent communication about budget impacts
• Aligned interests in project success

For example, when a supplier raises prices mid-project, both parties can work together to source alternatives or adjust specifications to stay on budget.

Key takeaway: Shared transparency leads to better solutions and smoother project execution.

The Disadvantages Of A Cost-Plus Contract

Cost-plus contracts offer significant benefits, but they’re not without challenges. Let’s explore the potential pitfalls that project managers and contractors should carefully consider when implementing construction contract management strategies.

Potential for Cost Overruns

You’re halfway through a major office renovation when your contractor submits invoices for premium materials you hadn’t anticipated. Since they’re getting reimbursed for all costs plus their fee, there’s limited incentive to hunt for better deals or manage expenses aggressively.

This scenario plays out more often than you may think. Without proper controls, contractors might not feel the pressure to negotiate with suppliers or optimize resource allocation. A $500,000 project can quickly balloon to $750,000 when there’s no financial motivation to keep costs in check.

Smart project managers combat this by establishing clear budget guidelines and regular review processes. Building in cost control mechanisms from day one keeps everyone aligned and focused on financial efficiency.

Increased Administrative Burden

Managing a cost-plus contract can feel like running a small accounting firm. Every receipt, every hour worked, every piece of equipment used needs to be meticulously documented and verified. For contractors, this means dedicating significant resources to tracking and reporting expenses. Project managers find themselves spending countless hours reviewing and approving these detailed submissions.

Consider a medium-sized commercial build. Your project manager might spend 15-20 hours per week just reviewing cost documentation — time that could be spent managing the project. Meanwhile, your contractor needs dedicated staff just to maintain the paper trail.

The solution lies in adopting digital systems and clear documentation protocols from the start. The administrative load becomes more manageable when everyone knows exactly what to track and how to report it.

Lack of Cost Certainty

One of the toughest pills to swallow with cost-plus contracts is the inability to nail down a final price tag. Unlike fixed-price contracts, you’re essentially writing a blank check — albeit one with some controls in place. This uncertainty can wreak havoc on budgeting and financial planning.

For example, imagine a contractor starting a warehouse expansion project with a rough estimate of $2 million. Six months in, they’re looking at $2.5 million with no end in sight. Supply chain issues, labor shortages, and scope adjustments all contributed to the climbing costs.

The most successful projects counter this uncertainty by establishing detailed cost monitoring systems and regular budget reviews. Setting clear milestones and implementing a robust change management process keeps costs from spiraling while maintaining the flexibility that makes cost-plus contracts attractive in the first place.

Remember, these disadvantages don’t make cost-plus contracts a poor choice — they just require careful planning and proactive management to ensure success. Understanding these challenges upfront and putting systems in place to address them before they become issues are key.

A Cost-Plus Contract Template

Ever tried to write a cost-plus contract from scratch? Not easy the first, second, or even third time. That’s why we’ve gathered some excellent examples of what these contracts typically look like in the real world.

Before we show you these templates, let’s break down the essential elements that any solid cost-plus contract should include:

• Project Scope Definition
• Clear definition of direct and indirect costs
• Indirect Cost Allowances
• Specified fee structure (fixed fee or percentage)
• Documentation requirements
• Payment terms and schedule
• Audit rights
• Change order procedures
• Dispute Resolution Process

Here’s another example showing a variation of a cost-plus contract from SignNow:

Remember, even when using a template (yes, even ours) it’s always wise to have your final contract reviewed by legal counsel, especially for larger projects. Think of templates as the foundation — you still need to build the house that fits your specific needs.

Want to learn more about automating your contract creation process? Check out our guide on how to automate contract creation to save time and reduce errors.

A Cost-Plus Contract vs A Lump Sum Contract

Cost-plus and lump sum contracts price construction projects differently. For instance, a cost-plus contract reimburses all project costs plus a fee. Then a lump sum contract locks in a fixed price upfront, no matter what happens during construction.

Key Differences

To help you make the best choice for your project, let’s break down what sets apart these two contract types.

Cost-Plus Contract

• Reimbursement: Contractor gets reimbursed for actual costs plus an agreed fee
• Scope: Flexible scope and adjustable budget
• Cost Tracking: Detailed cost tracking required
• Bid Prices: Lower initial bid prices
• Best For: Complex or uncertain projects

Lump Sum Contract

• Price Structure: One fixed price for the entire project
• Scope: Rigid scope with formal change orders needed
• Cost Tracking: Minimal cost tracking required
• Bid Prices: Higher initial bid prices (risk premium built in)
• Best For: Simple, well-defined projects

When to Choose Each Type

Not sure which to select? Let’s explore when each type makes the most sense, so you can make an informed decision for your next construction project.

When to Choose Cost-Plus:

• Renovating historic buildings with unknown conditions
• Fast-tracked projects starting before design completion
• Complex projects with a high chance of scope changes
• When transparency and collaboration are priorities
• During periods of material price volatility

When to Choose Lump Sum:

• Building standard commercial spaces
• Projects with complete drawings and specifications
• When budget certainty is the top priority
• Simple renovations with a clear scope
• When minimal owner involvement is preferred

And for a visual representation of the differences, we put together these charts to show main differences and how it impacts project managers and contractors:

Practical Comparison

Aspect	Cost-Plus	Lump Sum
Risk for Contractor	Low	High
Risk for Owner	High	Low
Cost Transparency	High	Low
Administrative Burden	High	Low
Flexibility	High	Low
Budget Certainty	Low	High

For Project Managers

Cost-Plus	Lump Sum
Complete cost transparency	Fixed price for entire project
Higher administrative burden	Simpler administration
Unlimited budget exposure	Known total project cost
Flexible scope management	Less scope flexibility
More change order flexibility	Formal change order process required

For Contractors

Cost-Plus	Lump Sum
Guaranteed profit margin	Risk of cost overruns
Lower financial risk	Higher financial risk
Higher documentation requirements	Less detailed cost tracking
Easier to accommodate changes	Limited profit upside
Full cost recovery	Potential for higher profits if managed well

The bottom line: Choose cost-plus when flexibility and transparency matter most. Opt for lump sum when budget certainty is your primary concern. Neither contract type is inherently better — it’s about matching the contract type to your project’s specific needs.

A Cost-Plus Contract vs a Time and Materials Contract

These contracts may sound similar, but they have distinct differences that can significantly impact your project’s success. Let’s break down what sets them apart and when to use each one.

Key Differences

Understanding these core differences is just the start. To make the best choice for your project, consider specific scenarios where each contract type shines. 

Cost-Plus Contracts:

• Cover all project costs plus a predetermined profit margin
• Include overhead expenses and indirect costs
• Often have more complex administrative requirements
• Profit is clearly defined upfront
• Usually better suited for larger projects

Time and Materials Contracts:

• Focus specifically on labor hours and material costs
• Typically use preset hourly rates that include profit
• Simpler tracking and administration
• Profit is built into the rates
• Better for smaller or short-term projects

When to Choose Each Type

While these guidelines provide a solid framework, seeing how these contracts perform in practice can really drive the point home. Let’s look at a detailed practical comparison that breaks down how each contract type handles different aspects of project management.

Choose Time and Materials When:

• You need work to start immediately
• The project scope is unclear but urgently needed
• You’re dealing with emergency repairs
• The work is expected to be short-term
• You want simpler administration

Choose Cost-Plus When:

• You need full transparency on all project costs
• The project is complex with many moving parts
• You want control over material selection
• The project timeline extends beyond a few months
• You need detailed cost documentation for stakeholders

Practical Comparison Table

Factor	Time & Materials	Cost-Plus
Setup Speed	Fast	Slower
Administrative Load	Light	Heavy
Cost Transparency	Partial	Complete
Profit Structure	Built into rates	Separately defined
Best Project Size	Small to medium	Medium to large
Risk Level	Medium	Low for contractor, higher for owner

For Project Managers

Cost-Plus	Time and Materials
Covers all project costs	Focuses on labor hours and material costs
More complex administration	Simpler tracking and administration
Profit clearly defined upfront	Profit built into rates
Better for larger projects	Better for smaller or short-term projects
Full cost transparency	Partial cost transparency

For Contractors

Cost-Plus	Time and Materials
Guaranteed profit margin	Profit built into hourly rates
Covers overhead and indirect costs	May not cover all indirect costs
More detailed cost documentation	Less detailed cost tracking
Better for long-term projects	Ideal for short-term or urgent work
Flexibility in scope changes	Easier to start work immediately

Note: Time and materials contracts work like a running taxi meter — you pay for time spent and materials used. Cost-plus contracts are more like an open book where every expense is visible and accounted for, plus a clear profit margin.

The right choice often depends on your project’s size, urgency, and how much administrative oversight you can handle. For quick repairs or small projects, time and materials often wins. For major construction or complex renovations, cost-plus typically provides better control and transparency.

A Cost-Plus Contract vs a Unit Price Contract

Unit price contracts charge fixed rates for specific work units (like $X per square foot of flooring), while cost-plus contracts reimburse actual costs plus a fee. This core difference shapes how each contract handles risk, pricing, and project management.

Key Differences

To make the best choice for your project, consider the nuances each one presents. Here’s an overview of what makes them unique.

Unit Price Contracts:

• Set prices for specific units of work upfront
• Payment based on actual quantities completed
• Easier to compare competitive bids
• Works well for repetitive, measurable tasks
• Less paperwork and administrative overhead

Cost-Plus Contracts:

• Reimburse actual costs plus an agreed fee
• Require detailed expense tracking
• Focus on total project costs
• Better for complex, variable work
• Higher administrative requirements

When to Choose Each Type

Understanding when to use each contract type can mean the difference between a smooth project and constant headaches. Let’s examine specific scenarios that call for each approach, based on real-world experience and project requirements. 

Choose Unit Price When:

• Work can be broken into clear, measurable units
• You’re doing repetitive tasks (like road paving)
• You want to easily compare contractor bids
• Quantities may vary, but unit costs are stable
• You need simplified billing and verification

Choose Cost-Plus When:

• Work is complex or hard to quantify
• Project scope is uncertain
• You want full cost transparency
• Material prices are volatile
• Quality takes priority over the lowest bid

Practical Comparison

Factor	Unit Price	Cost-Plus
Risk Distribution	Shared	Owner bears most
Cost Certainty	Medium	Low
Administrative Load	Low	High
Flexibility	Low	High
Best Project Type	Repetitive work	Complex projects
Bid Comparison	Easy	Difficult

For Project Managers

Cost-Plus	Unit Price
Reimburses actual costs plus fee	Set prices for specific units of work
Requires detailed expense tracking	Payment based on actual quantities completed
Focus on total project costs	Easier to compare competitive bids
Better for complex, variable work	Works well for repetitive, measurable tasks
Higher administrative requirements	Less paperwork and administrative overhead

For Contractors

Cost-Plus	Unit Price
Guaranteed profit margin	Profit built into unit prices
Lower financial risk	Shared risk between contractor and owner
Higher documentation requirements	Simpler cost tracking
Easier to accommodate changes	Less flexibility for scope changes
Full cost recovery	Potential for higher profits if efficient

Bottom line: Choose a unit price contract when you have clearly defined, measurable work units and want simplified cost management. Opt for a cost-plus contract when dealing with complex projects where flexibility and transparency are crucial. 

But situations aren’t black and white — the best contract type depends on your specific project needs, risk tolerance, and management capabilities.

Cost-Plus Contract vs a Guaranteed Maximum Price (GMP) Contract

Think of a GMP contract as a cost-plus contract with a ceiling. Both contracts reimburse actual costs plus a fee, but a GMP sets an upper limit on what the owner will pay — no matter what happens.

Key Differences

Let’s look at each of the factors that make a GMP contract unique from a CPC contract. 

Cost-Plus:

• No maximum price limit
• Owner bears all cost risks
• Full reimbursement of costs plus fee
• Higher flexibility for changes

GMP:

• Fixed maximum price
• Shared cost risks
• Savings often split between parties
• Changes require formal amendments

When to Choose Each Type

Making the right choice between these contract types can significantly impact your project’s success. To help you visualize these differences more clearly, let’s see a side-by-side comparison.

Choose Cost-Plus When:

• Project scope is highly uncertain
• Speed matters more than cost certainty
• You want maximum flexibility
• Strong trust exists between parties

Choose GMP When:

• You need a maximum budget cap
• You want to incentivize cost savings
• Scope is reasonably well-defined
• Risk sharing is important

Practical Comparison Table

Factor	Cost-Plus	GMP
Budget Control	Limited	Strong
Risk for Contractor	Low	Medium-High
Risk for Owner	High	Medium
Change Flexibility	High	Medium
Cost Savings Incentive	Low	High
Administrative Burden	High	Very High

For Project Managers

Cost-Plus	GMP
Complete cost transparency	Limited exposure to cost overruns
Higher administrative burden	Requires intensive initial planning
Unlimited budget exposure	Known maximum project cost
Flexible scope management	Less scope flexibility
More change order flexibility	Formal change order process required

For Contractors

Cost-Plus	GMP
Guaranteed profit margin	Risk of exceeding maximum price
Lower financial risk	Shared cost overrun risk
Higher documentation requirements	Complex initial estimating needed
Easier to accommodate changes	Limited profit upside
Full cost recovery	Potential cost absorption above GMP

Cost-plus contracts are preferred when the project scope is unclear or likely to change, the speed to start is critical, or when material prices are volatile. They’re often used in projects like historic building renovations where unknown conditions could significantly impact scope and costs.

GMP contracts are ideal when budget certainty is important, scope is well-defined, and risk sharing is important. They’re commonly used for projects like new office building construction with complete architectural plans and specifications, where incentivizing cost savings is desired.

It also works best when paired with open-book accounting and regular cost reviews. This transparency helps prevent disputes and keeps everyone aligned on project goals.

Simplify Creating a Cost-Plus Contract With Docubee

Cost-plus contracts offer flexibility and transparency for construction projects with uncertain scopes or changing requirements. While they require detailed documentation and oversight, the right tools can transform this complex process into a streamlined operation.

Docubee’s construction contract management software helps you create, track, and manage cost-plus contracts efficiently. Our platform automates the documentation process, ensuring accurate cost tracking and transparent reporting.

With our Docubee document generation system, you can quickly create customized cost-plus contracts that meet your specific project needs. The platform handles everything from initial contract creation to ongoing cost monitoring and reporting.

Ready to simplify your cost-plus contract management? Contact Docubee today to learn how our solutions save time, reduce errors, and improve project oversight.