What is a cost plus contract?

If your Builder is offering a cost-plus contract, you might be wondering what that is and have a few questions. We break this down so you can enter contract negotiations confidently.

A cost-plus contract charges actual construction costs plus a predetermined percentage or fixed fee, hence the name ‘Cost Plus’. These contracts intend to reimburse the Builder for material and labour costs incurred plus a builder’s margin for overheads and profit.
Your contract will outline the percentage margin your Builder will use. For example, if your contract states the chargeable margin is 20% and your job’s actual cost $100,000 the Builder would charge $100,000.00 +20% = $120,000.00.

What is best practice in tracking your job’s actual cost? Your Builder should provide timesheets for direct employees, subcontractor invoices and material receipts with their progressive invoice. Check with your Builder on their process to ensure you are comfortable tracking actual costs.

It’s best to be invoiced regularly (fortnightly) to avoid large invoice values or variations building up and becoming uncontrolled.
How can you set your budget with a cost-plus contract? You can include a project estimate in a cost-plus contract, but there are warnings that this is an estimate and may not be actual project costs. Budget reports can be requested and are advised on large projects to keep track of expenses.

We recommend you understand how your Builder has estimated the project. How detailed is the proposal, and are the provisional sums and prime cost items clearly stated? Do you have a good idea of the inclusions, and does it match your vision for the project? Differences between design briefs and builders’ inclusions are usually where most variations occur.

Renovations are another critical area where costs can escalate; we suggest you engage a building inspector to identify any structural damage at your property. This report can form part of the scope of your Builder to minimise unexpected costs.

Cost-plus contracts should be used where it is not easy to assess the overall project cost, and the budget has some flexibility. Examples include client-funded extensive home renovations or during times of significant volatility in material pricing where the contract estimate uses worst-case pricing (i.e. Post-Covid & Ukraine War).




To preview a sample cost-plus contract and understand the set-out and terms and conditions check out this link to the Master Builders NSW Website – Cost Plus (Residential) Contract



Benefits Vs Disadvantages

The benefits of Cost-Plus contracts include:

• There is more incentive for your Builder to build to the highest quality instead of compromising quality to meet fixed costs,
• Allows more flexibility throughout the build,
• More administrative contract management is involved in successfully delivering a cost-plus contract, encouraging more open dialogue and communication between Builder & client,
• There is less incentive for builders to cut costs.

The Disadvantages of cost-plus contracts are:

• In most instances, banks won’t fund a project under a cost-plus contract,
• When administered poorly, there is a greater risk of cost blowouts,
• It can be used to underestimate the project cost to win the contract and inflate pricing post-contract execution.

You should enter into a cost-plus contract with a Building Company that has the capability to administer the contract effectively (i.e Project Managers). There should also be a high level of mutual trust between the client and the Builder; vetting potential companies during the tendering process is crucial here.

There are many great benefits to a well-executed cost-plus contract; ultimately, the end product should be you enjoying the creative process of building your custom dream home. If you want to chat with a Builder who can deliver this for you, learn more about us and get in touch with our team

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