We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Cost-Plus Contract?

Malcolm Tatum
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Sometimes called a cost reimbursement contract, the cost-plus contract is a legal agreement that allows a contractor to be paid in full for all expenses allowed by the terms of the contract, up to a set limit that is defined in the terms and conditions. In addition, the contractor may also receive additional compensation that will ensure that a profit is made on the job. There are several variations on this type of contract in common use today.

The provisions of the cost-plus contract are different from those associated with the fixed-price contract. With the latter, the contractor commits to only charging a specific amount for the job covered by the terms and conditions outlined in the agreement. Should the actual expenses exceed the costs associated with fulfilling the obligation made in the agreement, the contractor cannot pass those costs on to the client. Instead, the contractor must absorb those costs, which may result in a net loss on the project.

Four common variations of the cost-plus contract are used today. The cost plus fixed fee contract allows the contractor to collect a fixed amount of compensation at a specified time during the project. Additional expenses and fees are billed at a later date.

The cost-plus-incentive fee contract is another form of the cost-plus contract that can sometimes be to the advantage of the client. With this arrangement, the contractor receives a higher fee for saving money on materials or labor associated with fulfilling the terms of the agreement. However, the larger fee can sometimes offset the savings.

A cost plus award fee arrangement is a type of cost-plus contract that will award a bonus if the contractor demonstrates performance that is considered to be above the terms of the contract. The awarding of this fee is usually left to a third party, such as a review board. Cost-plus contract arrangements of this type are much more common when contracting work for companies and government agencies, but rarely used for residential construction, such as home building or renovations.

One final variation of the cost-plus contract is known as the cost-plus-percentage of cost agreement. Essentially, this type of contract makes it possible for the contractor to adjust charges for materials upward in the event that the market price for those materials increases. This is one of the least favorable forms of the cost-plus agreement, since it provides no incentive at all for the contractor to keep expenses within the range originally defined in the agreement.

Many individuals and businesses prefer to go with a fixed-price contract, simply because there is more control on the part of the client. Cost-plus contracts generally do not provide any motivation for the contractor to monitor costs closely. However, if quality rather than price is the main objective of the client, a cost-plus construction contract is likely to be the best option.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

By Potterspop — On May 14, 2011

@CaithnessCC - I don't think the second payment of expenses would be much of a surprise. Rather it is a way of splitting the plus part of the fee, essentially the profit, into two stages. This is useful for the contractor because they get some cashflow, and for the client as they can stagger outlay.

By CaithnessCC — On May 13, 2011

Are there any particular advantages to using the cost plus fixed fee option? It sounds as if there wouldn't be much control over the second wave of expenses a builder could present you with.

By Penzance356 — On May 12, 2011

From my experience of cost plus contracts in the construction industry I'd say they can be as tricky for the contractors as for the client.

Inexperienced folk may see them as potential money makers but not put enough thought into what percentage they need to add to the basic costs. It's easy to overlook something and then find the profit you expected has dwindled.

Malcolm Tatum

Malcolm Tatum


Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.