A cost plus contract is a construction agreement where you pay 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 dollar amount. You get open books and flexibility. The contractor gets paid for the work actually done, and you carry more of the budget risk.
If you're renovating an older commercial building, there's a good chance a contractor will offer you cost plus instead of a fixed price. That's usually because nobody knows what's behind the walls yet. Here's how a cost plus contract works, what fee structures look like, how to compare it with a fixed price bid, and the protections I'd put in before signing.
How a cost plus contract works
Under a cost plus contract, the contractor bills you for the "cost of the work" (defined in the contract) and adds a fee on top. The cost of the work normally includes:
- Subcontractor invoices (electrical, plumbing, HVAC, roofing, and so on)
- Materials and equipment rentals
- The contractor's own field labor
- General conditions, like the site superintendent, dumpsters, temporary power, and permits
The fee covers the contractor's home office overhead and profit. Since every cost passes through to you, you should see every invoice. That transparency is the main reason to use cost plus.
Percentage fee vs fixed fee
There are two common ways to set the fee.
Cost plus a percentage. The contractor earns a percentage of total cost. Simple, but there's a built in conflict: the more the job costs, the more the contractor makes.
Cost plus a fixed fee. The contractor earns a set dollar amount regardless of final cost. That removes the incentive to let costs creep. It's my preference once the scope is reasonably defined.
Same job, two fee structures (example numbers)
What contractor fee is normal?
There isn't one right number, and I'm not going to make one up. The fee depends on the size of the job, the complexity, the market, and how busy contractors are. Smaller jobs usually carry a higher percentage, because the contractor still has to cover a project manager, insurance, and office overhead whether the job is $80,000 or $800,000. Larger jobs usually carry a lower percentage.
The way to find "normal" in your market is to ask for it. Get at least three bids and have each contractor break out:
- The fee (percentage or fixed amount)
- General conditions, listed separately from the fee
- Contractor labor rates, by role
- Any markup on change orders
That last part is where fees hide. One contractor's 8% fee with general conditions loaded into it can cost more than another's 12% fee with lean general conditions. Compare the total, not the headline percentage.
Cost plus vs a fixed price (lump sum) contract
| Cost plus | Fixed price | |
|---|---|---|
| Who carries overrun risk | Owner, unless there's a cap | Contractor, except for change orders |
| Transparency | Open books | You see one number |
| Best for | Unknown conditions, older buildings, fast starts | Fully designed, well defined scopes |
| Contingency in price | Usually none, you hold it | Built into the bid |
| Owner's time | Higher, you review invoices | Lower |
A fixed price looks safer, but contractors price in the unknowns. On a building with old wiring and a roof nobody's been on in ten years, that padding can be large. Cost plus lets you pay for what's actually there. It also means you're the one holding the contingency.
Add a guaranteed maximum price
The best of both is cost plus with a guaranteed maximum price, called a GMP. You pay actual cost plus the fee, up to a ceiling. If costs go past the GMP (without an approved change in scope), the contractor eats it. Some GMP contracts also include a shared savings clause, where you split any savings below the cap. That gives the contractor a reason to bring the job in under budget.
A GMP requires enough design for the contractor to price the risk, so it's not always available early. On a gut renovation, I've started cost plus during demo and then converted to a GMP once the conditions were exposed.
How to protect yourself on a cost plus contract
- Define the cost of the work. Spell out what is reimbursable and what is covered by the fee. Home office staff, for example, usually belong in the fee.
- Require open books and audit rights. Every invoice, every pay app, and the right to audit at the end.
- Get competitive sub bids. Ask for three bids on major trades and see them.
- Set the change order markup in advance. Don't negotiate it in the middle of the job.
- Hold retainage. Withhold a percentage of each draw until completion, as your lender likely will anyway.
- Carry your own contingency. Budget it in your underwriting before you buy, not after the first surprise.
I've learned the hard way that the contract matters less than the contractor. Ask about past cost plus jobs, call the owners, and use my list of questions to ask before hiring a commercial contractor.
How it fits into your deal
If you're financing a renovation, your lender will want a budget, a contractor, and a draw schedule. A cost plus contract without a cap gives the lender less certainty, so expect them to ask for a bigger contingency or a GMP. Either way, the renovation budget feeds straight into your total basis. On a value add deal, a 20% overrun can erase the spread you were buying for. That's why I stress test construction costs in every value add analysis.
Have a construction attorney review the contract. Standard industry forms (like the AIA cost plus agreements) are a good starting point, but the definitions are where you win or lose.
Frequently asked questions
What is a cost plus contract?
A cost plus contract is a construction agreement where the owner pays the contractor's actual cost of labor, materials, and subcontractors, plus a fee for overhead and profit. The fee is either a percentage of cost or a fixed dollar amount.
What is a typical cost plus fee?
It varies by project size, complexity, and market, so get at least three bids. Smaller jobs tend to carry a higher percentage than large ones. Compare the fee together with general conditions and change order markups, because that total is what you actually pay.
Is cost plus better than a fixed price contract?
Cost plus works better when the scope is uncertain, such as an older building with unknown conditions. A fixed price contract works better when plans are complete. Many owners use cost plus with a guaranteed maximum price to get transparency and a cap.
What is a guaranteed maximum price (GMP)?
A GMP is a cap on a cost plus contract. The owner pays actual cost plus the fee up to the maximum, and the contractor absorbs costs above it unless the scope changes. Some GMP contracts split any savings below the cap.
What costs are not reimbursable in a cost plus contract?
That depends on the contract, which should list them. Commonly excluded costs include the contractor's home office overhead and staff, costs from the contractor's own negligence, and anything above an agreed cap. Define these before work starts.
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