What Is Cost Plus Pricing?
By BRIX Editorial Team · Updated
Cost plus pricing means the customer pays the contractor's actual job costs plus an agreed fee for overhead and profit. The fee is either a percentage of cost or a fixed dollar amount. On a remodel with $80,000 of actual costs and an 18% fee, the customer pays $94,400. The books are open to the customer.
Key takeaways
- Cost plus percentage: Price = Actual cost × (1 + Fee %). Cost plus fixed fee: Price = Actual cost + Fixed fee.
- A percentage fee grows when costs grow, which is why customers worry it rewards overruns. A fixed fee doesn't.
- The contract must define exactly what counts as cost: burdened labor, subs, materials, supervision, small tools, office time.
- Cost plus is open book. You need receipts, timesheets and clean job costing to get paid in full.
- Federal contracts can't use cost-plus-a-percentage-of-cost at all; the FAR prohibits it.
How does cost plus pricing work?
Cost plus pricing works by splitting the price into two parts: the actual cost of the work, passed through to the customer with receipts, and a fee that pays the contractor's overhead and profit. The customer sees every cost. In exchange, the contractor doesn't have to bet on a fixed price when the design or scope is still changing.
Cost plus percentage: Price = Actual cost × (1 + Fee %) | Cost plus fixed fee: Price = Actual cost + Fixed fee
- Actual cost
- the reimbursable job costs the contract allows, backed by receipts and timesheets
- Fee %
- the agreed percentage of cost, as a decimal (18% = 0.18)
- Fixed fee
- an agreed dollar amount, set from the estimated cost at signing
Cost plus percentage vs. cost plus fixed fee
The difference is how the fee responds to cost changes. A percentage fee moves with cost, so it's simple and protects the contractor when scope grows, but it gives the customer reason to question every overrun. A fixed fee is set at signing, so the contractor earns the same whether costs rise or fall, and the fee is renegotiated only through a change order when scope changes.
| Cost plus percentage | Cost plus fixed fee | |
|---|---|---|
| Fee when costs rise | Rises with cost | Stays the same |
| Fee when costs fall | Falls with cost | Stays the same, so savings raise your effective margin |
| Customer's main worry | "You earn more if it costs more" | "What if the fee was padded?" |
| Contractor's main risk | Disputes over which costs are legitimate | Scope creep without a change order |
| Fits best | Small jobs, allowances, early design phases | Larger remodels and custom builds with a solid estimate |
Federal rules show how seriously the percentage version's incentive is taken. FAR 16.102(c) states that the cost-plus-a-percentage-of-cost system of contracting shall not be used, and it requires prime contracts other than firm-fixed-price ones to bar that kind of subcontract too. Private residential and commercial contracts aren't covered by the FAR, but customers often raise the same objection.
What counts as cost in a cost plus contract?
What counts as cost is whatever the contract says, and that one clause decides whether cost plus is profitable for you. If supervision, small tools, truck time and the office hours spent buying and scheduling aren't reimbursable costs, your fee has to cover them. Write the list down before signing, item by item.
| Cost item | Usually reimbursable? | Why it matters |
|---|---|---|
| Materials and equipment installed | Yes, at invoice cost | Decide who keeps supplier rebates and early-pay discounts |
| Subcontractors | Yes, at invoice cost | Spell out whether you may add a markup on subs or if the fee covers it |
| Field labor | Yes | Agree whether it's billed at raw wage or at burdened cost including taxes, workers' comp and benefits |
| Site supervision | Often, if listed | If it isn't listed, your project lead's time comes out of the fee |
| Permits, dumpsters, temporary utilities | Yes | Easy to forget on the cost report |
| Small tools and consumables | Depends | Some contracts allow a flat percentage; others treat them as overhead |
| Office, estimating, insurance, vehicles | Usually not | These are overhead the fee has to pay for |
What is a maximum price cap on cost plus?
A maximum price cap, written as a GMP or not-to-exceed price in most contracts, limits the total the customer will pay on a cost-plus contract. You still bill actual cost plus the fee, but anything over the cap is yours to absorb unless the customer approves a change. Some contracts split savings under the cap between the customer and contractor. A cap brings cost plus closer to a fixed bid, so price the fee for the extra risk.
Cost plus pricing by trade
| Trade | Where cost plus fits | What to watch |
|---|---|---|
| Custom home builders | Custom homes where finishes are chosen as the build goes | Allowance overruns; owner-supplied materials and their warranty |
| Remodeling | Whole-home and kitchen remodels with unknown conditions behind walls | Clear rules for change orders and which costs carry the fee |
| Restoration | Emergency mitigation before the full scope is known | Matching the cost report to the insurer's estimate format |
| Commercial HVAC, plumbing and electrical | Tenant improvements and change work under a GC | The GC's contract may cap or define your fee |
| Landscaping | Design-build projects that evolve on site | Plant and stone price swings between design and install |
| Service trades (residential) | Rare; flat rate and T&M are more common | Most homeowners prefer a firm price on service work |
Cost plus vs. fixed price: which is better?
Cost plus is better when the scope will change as the job goes and nobody can price it honestly up front. A fixed price is better when the scope is clear, because the customer knows the total and you keep the savings from running the job well. Many contractors start with cost plus for design-heavy work and use fixed bids or flat rate pricing for everything else. For the full side-by-side, see time and materials pricing, and for the difference between proposal types, estimate vs. quote vs. bid.
Common cost plus mistakes
- Treating the fee as all profit. The fee usually has to pay overhead first. If overhead is 12% of cost and the fee is 15%, profit is only about 3% of cost.
- Billing raw wages as labor cost. If the contract allows it, bill burdened labor. Otherwise the payroll taxes and insurance come out of your fee.
- Weak record-keeping. On an open-book job, a missing receipt is a cost you may not get back. Track every cost against the job as it happens. See job costing.
- No change-order process. Scope growth on a fixed fee without a change order means more work for the same fee.
- Agreeing to a cap without padding the fee. A capped cost-plus job carries fixed-price risk. Price it that way.
- Slow cost reports. Customers on cost plus expect regular updates. Monthly or per-draw reports with backup keep payments moving.
Frequently asked questions
What is cost plus pricing in construction?
It's a contract where the owner pays the contractor's actual costs for labor, materials and subcontractors, plus a fee for overhead and profit. The fee is either a percentage of cost or a fixed amount. The contractor shares receipts and records so the owner can see what was spent.
What is a typical cost plus fee?
There's no single standard, because the fee has to cover your own overhead and profit, which differ by company and project. Work it out from your numbers: overhead not reimbursed by the contract plus the profit you need, as a share of expected cost. Federal cost-plus-fixed-fee contracts have their own limits under the FAR.
Is cost plus good for homeowners?
It can be when the design isn't final or hidden conditions are likely, because they pay actual cost instead of a padded fixed price. The tradeoff is that the final total isn't known up front. A maximum price cap and regular cost reports reduce that uncertainty.
Why is cost plus a percentage of cost banned in federal contracts?
Because a percentage fee pays the contractor more the more the job costs, which removes the incentive to control spending. FAR 16.102(c) says the cost-plus-a-percentage-of-cost system of contracting shall not be used. That rule applies to federal contracts, not private residential jobs.
What's the difference between cost plus and time and materials?
Both bill actual costs, but they're built differently. Time and materials bills hours at a fixed hourly rate that already includes overhead and profit, plus materials. Cost plus bills all costs at actual cost, including labor, and adds a separate fee on top.
Can a contractor mark up subcontractors on a cost plus job?
Only if the contract allows it. Some contracts let the fee apply to all costs including subs, some allow a separate sub markup, and some exclude subs from the fee. Settle it in writing before work starts.
Related
- What Is Time and Materials Pricing?Time and materials pricing bills hours at a set rate plus materials. See the T&M formula, how not-to-exceed caps work, and when T&M beats a fixed price.
- What Is Flat Rate Pricing?Flat rate pricing quotes a fixed price per task before work starts. Learn how to build flat-rate prices and a pricebook, and when it beats hourly billing.
- What Is Markup?Markup is what you add to cost to set a price. Learn the markup formula, how contractors mark up materials, equipment, subs and labor, with examples.
- What Is Overhead, and How Do Contractors Calculate It?What counts as overhead in a trades business and how to calculate your overhead rate per revenue dollar, billable hour, job and day, with a worked example.
- What Is Job Costing?Job costing tracks what each job really cost vs. the estimate. What to track, a sample job cost report with variances, and a simple system for small crews.
- What Is a Change Order?What a change order is, what it must include, how to price one with overhead and profit, and how to track change orders so extra work gets paid.
- Estimate vs. Quote vs. Bid: What's the Difference?Estimate, quote, bid and proposal explained for contractors: how binding each is, when to use which, a side-by-side table, and how to word yours.
- Job Pricing Calculator for ContractorsPrice any job for profit: enter labor hours, burdened rate, materials, overhead and target profit to get the price to quote, your margin and markup.
- How to Price Contracting Jobs for Profit: The Complete GuideHow to price trades jobs: true labor cost, overhead per billable hour, profit margin, materials markup and flat rates, with worked numbers.
- Maintenance Agreement Pricing CalculatorPrice HVAC, plumbing, pest control and lawn care maintenance agreements from your real costs. Get yearly and monthly prices, margin and tech hours needed.
Sources
- Federal Acquisition Regulation 16.102, Policies (cost-plus-a-percentage-of-cost prohibition) (checked October 12, 2026)
- Federal Acquisition Regulation 15.404-4, Profit (fee limits on cost-plus-fixed-fee contracts) (checked October 12, 2026)