"You'll see every receipt." That is the pitch. A cost-plus contract means the homeowner pays the actual cost of materials and labor, plus an agreed-upon markup covering overhead and profit. Total transparency. No hidden numbers. Except that cost-plus contracts are one of the most common ways residential construction projects exceed budget by 30-50% — and the receipts are right there in front of you the entire time, growing.

The transparency is real. The problem is not that you cannot see the costs. It is that nothing in the contract structure stops them from climbing.

How cost-plus pricing works

The contractor tracks every dollar spent on your project — every lumber receipt, every hour of labor, every dumpster rental — and adds a percentage markup on top. The markup structure varies, and each version carries different risk:

  • Flat percentage on total cost — The most common structure. The contractor adds 15-20% on top of all materials and labor combined. If the project costs $40,000 in direct costs, you pay $46,000-$48,000.
  • Split markup — Different percentages for materials and labor. Typically 15-20% on materials and 10-15% on labor. This structure recognizes that the contractor does not need the same margin on labor (which they mark up from their crew's wage) as on materials (which they purchase at trade pricing).
  • Fixed fee — Instead of a percentage, the contractor charges a flat management fee (e.g., $8,000) regardless of what the project costs. This is the most homeowner-friendly version because the contractor has no financial incentive to increase spending.
The math that matters: On a percentage-based cost-plus contract, every additional dollar spent on your project earns the contractor more money. If the markup is 18% and a tile selection delay adds $4,000 in labor, the contractor earns an extra $720 from that delay. There is no built-in incentive for efficiency. This is not a flaw in the contractor's character — it is a flaw in the contract structure.

When cost-plus makes sense

Cost-plus is the right tool for a narrow set of situations — and within that range, it is genuinely the best option:

  • Undefined scope — If the full extent of the work cannot be determined before starting (e.g., a fire-damaged home where the contractor needs to open walls to assess structural damage), a fixed-price bid would either be wildly inflated to cover unknowns or dangerously low.
  • Discovery and investigation work — Removing an interior wall to determine if it is load-bearing, scoping a sewer line, or performing selective demolition to assess foundation conditions. These tasks have highly variable durations.
  • Insurance restoration — Insurance claims often require cost-plus pricing because the insurance adjuster needs to see actual costs. Xactimate estimating software produces unit-rate pricing that aligns with cost-plus documentation.
  • High-trust, repeat relationships — If you have worked with a contractor on 3 prior projects and have verified their billing accuracy, cost-plus with a trusted builder can be efficient because it eliminates the contingency padding that fixed-price bids include.

When cost-plus backfires

Outside those narrow scenarios, cost-plus introduces risk that a fixed-price contract would have eliminated entirely. Kitchen remodels, bathroom renovations, additions — if the scope is defined, the incentive structure of cost-plus works against you.

Red flag: A contractor who insists on cost-plus for a project with a well-defined scope (e.g., "replace all windows on the first floor" or "build a 12x16 deck") is telling you they either cannot estimate accurately or do not want to be held to a number. Both are problems. A competent contractor can price defined scope as fixed-price and absorb the estimating risk — that is literally their job.

No incentive to finish quickly

On a fixed-price contract, every day the project runs long costs the contractor money — they are paying their crew out of a fixed budget. Cost-plus inverts that entirely. Every additional day earns them more markup. A two-week delay on a $85/hr labor rate with a two-person crew adds $13,600 in billable labor. At 18% markup, the contractor pockets an additional $2,448 from that delay. They are not rooting for you to fall behind on tile selections. But they are certainly not losing sleep over it either.

No cap on total cost

A cost-plus contract without a cap is, functionally, a blank check with a running total you get to watch. The contractor provides an "estimate" of $28,000, but the contract does not limit the total. Material prices increase. The tile you chose is backordered so the crew idles for a week. A subcontractor misses their window and has to be rescheduled. Each of these adds cost, and all of it is billable to you.

Example: A bathroom remodel estimated at $28,000 fixed-price by Contractor A is bid as cost-plus by Contractor B, who estimates $25,000-$30,000. The homeowner chooses Contractor B, assuming the lower end. The project runs cost-plus: tile selection takes two weeks of back-and-forth, adding idle crew time at $85/hr × 8 hrs/day × 2 workers × 6 idle days = $8,160 in labor. The plumbing rough-in hits an unexpected cast iron stack that requires 4 extra hours ($520). Permit inspection fails on the shower pan slope, requiring a tear-out and redo ($2,200). Final cost-plus total: $41,340 — 47% over the original estimate and $13,340 more than Contractor A's fixed-price bid would have been.

The "open book" illusion

Here is what "open book" actually opens: the material receipts. You see every trip to the supply house, every dumpster invoice, every box of screws. What you cannot verify is the other half of the ledger — labor hours. If the daily log says the crew worked 9 hours on Tuesday, you have no way to confirm that unless you were on-site watching. Time tracking on residential cost-plus projects is almost entirely self-reported by the contractor. That is a book with half its pages unauditable.

Red flag: A cost-plus contractor who cannot produce daily time logs with crew names, arrival/departure times, and a description of work performed for each day is billing you based on estimates, not actuals. "Open book" means nothing if half the book — the labor side — is unverifiable.

GMP: the hybrid approach

A Guaranteed Maximum Price (GMP) contract takes the transparency of cost-plus and bolts a ceiling onto it. The contractor bills at cost-plus rates, but the total cannot exceed a specified maximum. Come in under, and you pay less (or share the savings). Go over, and the contractor absorbs the difference. It is the structure that keeps the incentives honest on both sides.

How GMP works in practice: A kitchen remodel with a GMP of $52,000 and an 18% markup. The contractor tracks actual costs of $38,500 in materials and labor. With the 18% markup, the billed total is $45,430 — under the GMP, so you pay $45,430. If a savings-share clause is included (common at 50/50), you and the contractor split the $6,570 difference, and your final cost is $45,430 + $0 = $45,430 while the contractor keeps their standard markup. If actual costs hit $48,000, the billed total would be $56,640, which exceeds the GMP — so you pay $52,000 and the contractor absorbs the $4,640 overage.

For projects with moderate uncertainty, GMP is the most balanced structure available. It gives you cost transparency and a hard ceiling. It gives the contractor flexibility to handle unknowns without submitting a change order for every minor variation. Neither side carries all the risk.

Protecting yourself on a cost-plus contract

If cost-plus genuinely fits your project, these contract provisions keep it from drifting into open-ended territory:

  • Weekly cost reports — The contractor provides a detailed report every Friday showing cumulative materials cost, cumulative labor hours by trade, markup applied, and remaining budget against the estimate. If the project is trending 20% over estimate by week 3 of an 8-week project, you know early enough to course-correct.
  • GMP or not-to-exceed cap — Set a maximum total that the contractor cannot exceed without written approval. The cap should be 10-15% above the estimate to allow for reasonable variation without requiring constant amendments.
  • Labor hour caps by phase — Instead of capping total cost only, cap labor hours for each project phase. If demolition is estimated at 40 hours, the contract states 40 hours maximum for demolition. Overages require written approval with an explanation of why the estimate was insufficient.
  • Material pre-approval over a threshold — Any material purchase over $500 requires homeowner approval before the order is placed. This prevents the contractor from selecting premium materials at your expense without your input.
  • Defined labor rates — Lock in hourly rates by trade for the duration of the project: lead carpenter $75/hr, journeyman $55/hr, laborer $35/hr, licensed electrician $95/hr, licensed plumber $100/hr. These rates should be listed in the contract, not adjustable.

Cost-plus vs. fixed-price: the decision framework

Choose fixed-price when the scope is defined, you have at least two comparable bids, and the project does not involve opening walls or other discovery work. Choose cost-plus with GMP when the scope has meaningful unknowns, the contractor has a strong track record with verifiable references, and you are willing to review weekly cost reports. Choose cost-plus with fixed fee when you have a high-trust relationship with the contractor and want maximum transparency with a capped profit margin.

The contract structure is not a detail. It is the single decision that determines whether cost overruns come out of the contractor's margin or out of your bank account — and by the time you realize which one it is, the walls are already open.

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