What is a cost-plus contract?
A cost-plus contract requires the client to reimburse the builder for all verified project costs, labour, and materials, plus an agreed percentage or fixed margin as the builder's fee.
In a cost-plus contract, the builder charges the client for the actual expenses incurred on site and off site, including labour, materials, subcontractor fees, and project overheads, then adds an agreed margin or percentage on top as their profit. This structure differs from fixed-price contracts where the total cost is locked in before work begins.
Custom home builders often use cost-plus arrangements because the full scope of work may not be known at the outset, or because clients want flexibility to change designs, upgrade finishes, or adapt plans during construction. The client typically receives documented invoices, delivery notes, and timesheets to verify costs are legitimate. The builder's margin covers their site management, coordination, risk, and profit.
Cost-plus contracts work best when there is trust between builder and client, clear communication about what constitutes a legitimate cost, and agreement on the margin percentage upfront. The client gets transparency into actual spending and control over changes, but bears the risk that the project may cost more than initially estimated. The builder is protected from unexpected price inflation on materials or labour.
When engaging a custom home builder, it helps to understand whether the quote is cost-plus, fixed-price, or a hybrid arrangement, and what expenses are included in the builder's margin.