A cost-plus contract is a construction agreement in which the owner reimburses the contractor for the actual cost of the work plus a separate fee for overhead and profit. Because the owner pays whatever the work actually costs, the owner, not the contractor, bears the risk of a cost overrun unless a price ceiling is added.
How a Cost-Plus Contract Works
A cost-plus contract works by separating the price into two parts: the reimbursable cost of the work and a fee layered on top. Per AIA Contract Documents, standard forms such as A102 and A103 define the "Cost of the Work" in Article 7, covering labor, materials, equipment, and subcontractor costs the owner reimburses at actual expense.
The fee compensates the contractor for overhead and profit and takes one of a few forms. In a fixed-fee structure the fee is a set dollar amount agreed up front. In a percentage-fee structure the fee is a stated percentage of the actual cost of the work, so it rises as spending rises. The Federal Acquisition Regulation addresses the fixed-fee form for cost-reimbursement construction at FAR 52.216-9.
Cost-plus contracts are administered on an open-book basis. The contractor submits actual invoices, payroll, and subcontractor billings, and the owner audits and reimburses documented cost. This transparency is the defining feature: the owner sees real cost rather than a marked-up price. The tradeoff is overrun exposure, which is why many cost-plus agreements add a guaranteed maximum price or a savings clause.
Fee variant | How the fee is set | Cost incentive |
|---|---|---|
Fixed fee | Set dollar amount agreed at signing | Fee does not rise with spending |
Percentage fee | Stated percent of actual cost of work | Fee rises as cost rises |
Fee with GMP cap | Cost plus fee, capped at a ceiling | Contractor absorbs cost above the cap |
Why a Cost-Plus Contract Matters
A cost-plus contract matters because it shifts cost risk to the owner in exchange for speed and flexibility. It lets construction begin before the design is complete, since the price is not fixed at signing, and it avoids the padded contingencies a contractor builds into a fixed price to protect itself. Per ConsensusDocs, cost-plus structures suit projects with uncertain scope or volatile input prices.
The cost of that flexibility is overrun exposure. In a pure cost-plus contract with no ceiling, the owner reimburses every documented dollar, so a scope change, a labor shortage, or a materials spike lands on the owner's budget. A percentage fee sharpens the concern, because a contractor earning a percent of cost has no direct financial reason to spend less.
Owners manage this risk with two tools. A guaranteed maximum price caps total reimbursement, so the contractor absorbs cost above the ceiling. A shared savings clause, described by law firm Miller Nash, splits any underrun between owner and contractor, often near a 50-50 division, giving the contractor a reason to hold cost down.
Example
An owner and contractor sign a cost-plus contract with a $10,000,000 estimated cost of the work and a 5 percent fee. Actual cost comes in at $11,000,000. The table shows the owner's total under a pure cost-plus contract versus the same contract with a $10,500,000 guaranteed maximum price, and who absorbs the $1,000,000 overrun.
Item | Pure cost-plus | Cost-plus with GMP cap |
|---|---|---|
Estimated cost of work | $10,000,000 | $10,000,000 |
Actual cost of work | $11,000,000 | $11,000,000 |
Fee (5% of estimate) | $500,000 | $500,000 |
GMP ceiling | None | $10,500,000 cost + fee |
Owner pays | $11,500,000 | $11,000,000 |
Who bears the overrun | Owner | Contractor |
Under the pure cost-plus contract, the owner reimburses the full $11,000,000 cost plus the $500,000 fee, or $11,500,000, absorbing the entire $1,000,000 overrun. Under the GMP-capped version, the owner's cost reimbursement stops at the $10,500,000 ceiling, so the contractor eats the $500,000 above the cap. The cap converts open-ended owner risk into a bounded number.
Variations and Edge Cases
Cost-plus contracts vary by how the fee is set and whether a ceiling applies. Standard form families each publish both capped and uncapped versions, and hybrid structures blend fixed and reimbursable elements.
Variant | Treatment |
|---|---|
Cost-plus without GMP | Owner reimburses all documented cost; ConsensusDocs 235 and 510 |
Cost-plus with GMP | Reimbursement capped at a ceiling; ConsensusDocs 230 and 500, AIA A102 |
Cost-plus fixed fee | Fee is a set dollar amount, not a percentage |
Cost-plus percentage fee | Fee scales with actual cost |
Hybrid with lump-sum general conditions | General conditions billed as a fixed sum, work reimbursed at cost; per law firm Ogletree Deakins |
Cost-Plus Contract vs Lump-Sum Contract
A cost-plus contract is often confused with a lump-sum contract, but they allocate cost risk in opposite directions. A cost-plus contract reimburses the contractor's actual cost of work plus a fee, so the owner bears overrun risk. A lump-sum contract, also called a fixed-price contract, sets one agreed price for the entire scope, so the contractor bears overrun risk and keeps any savings.
The practical difference is certainty versus transparency. Lump-sum gives the owner a known price but hides the contractor's real cost and built-in contingency. Cost-plus gives the owner open-book visibility into real cost but an uncertain final number unless a guaranteed maximum price caps it.
Frequently Asked Questions
What is a cost-plus contract in construction? A cost-plus contract is a construction agreement in which the owner reimburses the contractor for the actual cost of the work plus a separate fee for overhead and profit. Because the owner pays whatever the work actually costs, the owner bears the risk of a cost overrun unless a price ceiling is added.
Who bears the risk of a cost overrun in a cost-plus contract? In a pure cost-plus contract with no ceiling, the owner bears the overrun, reimbursing every documented dollar of cost. When a guaranteed maximum price is added, the contractor absorbs cost above the cap, so the risk shifts to the contractor for spending beyond the ceiling.
What are the fee types in a cost-plus contract? The two common fee types are a fixed fee, a set dollar amount agreed at signing, and a percentage fee, a stated percent of the actual cost of the work. A percentage fee rises as cost rises, while a fixed fee stays flat regardless of final cost.