What Is a Cost-Plus Contract?

How a cost-plus contract works

On a fixed-price job, the owner buys a finished result for one number. On a cost-plus job, the owner pays what the work actually costs, as the money goes out, and the contractor's fee rides on top.

That flips the risk. If the work costs more than expected, the owner pays more and the contractor's fee is protected. Owners accept that when the scope can't be pinned down before work starts: an old building with unknown conditions, a storm or fire repair, a custom home whose finishes aren't chosen yet, or a project that has to break ground before the design is done.

The American Institute of Architects (AIA) publishes standard construction contract forms. Its A103-2017 agreement, for cost plus a fee with no price cap, is meant for large projects where the cost isn't fully known when construction starts. AIA also says it isn't intended for competitive bidding.

Cost-plus is often confused with time and materials. On a T&M job, overhead and profit are folded into each hourly rate. On a cost-plus job, the owner pays the actual wages and payroll costs and sees the fee as its own line.

What counts as cost and what doesn't

Every cost-plus contract turns on its definition of the "cost of the work," meaning the costs the owner reimburses. Anything outside that definition is covered by the fee or paid by the contractor.

In AIA's A103-2017, reimbursable costs include wages of the crew building the project, site supervision the owner approves, payroll taxes, insurance and benefits on that labor, subcontracts, materials built into the project, equipment rentals, debris removal, permit fees, required testing, and sales and use taxes the contractor owes on the work. Rates can't be higher than the going rate where the project is, unless the owner approves in advance.

Unless the form says otherwise, it leaves out salaries and expenses of the contractor's main office, general overhead not listed in the contract, bonuses the owner hasn't approved, the contractor's own financing costs, such as interest on money it puts into the job, and costs caused by the negligence of the contractor, its subs or its suppliers. Anything not expressly listed as a reimbursable cost is excluded. Read this part twice before signing, because every gray area turns into a question at audit time.

Types of cost-plus contracts

Cost plus a fixed fee

The fee is a set dollar amount agreed at the start, such as $40,000 on a job estimated at $400,000. It doesn't rise when costs rise, so the contractor gains nothing by letting costs grow.

Cost plus a percentage of cost

The fee is a percentage of actual cost, for example 10%. AIA's form lets the parties state the fee as a lump sum, a percentage of cost or another formula. The weakness is plain arithmetic: every extra dollar of cost earns the contractor another 10 cents. Most contractors won't run up costs on purpose, but nothing in the structure pushes back when costs drift. Federal contracts ban this version, as covered below.

Cost plus a fee with a guaranteed maximum price

A third version adds a ceiling called a guaranteed maximum price (GMP): the contractor guarantees the total won't go above it and pays any excess itself unless a change order moves the cap, and AIA covers this setup in its separate A102 form.

Worked example: fixed fee vs percentage fee

A contractor is building out a dental office. The cost of the work is estimated at $400,000, and the owner is choosing between a $40,000 fixed fee and a fee of 10% of cost. Midway through, material prices rise and a supplier delay adds weeks of site supervision. Cost lands at $460,000, with no change in scope.

At the estimate, both deals cost the owner $440,000. At $460,000, the fixed fee still pays the contractor $40,000, while the percentage fee pays $46,000: 10% of the extra $60,000 went to the contractor for the same scope of work.

Cost-plus rules on federal contracts

Federal rules restrict cost-plus pricing, and they apply only to federal contracts, not to private jobs. In the Federal Acquisition Regulation (FAR) edition effective March 13, 2026, FAR 16.102(c) bans the cost-plus-a-percentage-of-cost system outright, citing federal statutes. It also requires federal prime contracts (those directly with the government), unless they are firm-fixed-price (a price set up front), to ban cost-plus-percentage subcontracts.

Federal cost-reimbursement work, where the government pays allowable costs, uses other fee types, such as a fixed fee, an incentive fee tied to cost targets, or an award fee based on performance. Even the fixed fee is capped. Under FAR 15.404-4, the fee on a federal cost-plus-fixed-fee contract can't exceed 10% of the contract's estimated cost, not counting the fee, or 15% for experimental, developmental or research work.

Among other conditions, FAR 16.301-3 allows a federal cost-reimbursement contract only when the contractor's accounting system is adequate for determining the contract's costs, and never for buying commercial products or services.

These federal rules are being rewritten. The FAR overhaul text, a temporary stand-in until formal rulemaking finishes, keeps the ban and the fee caps, and a proposed rewrite was published September 18, 2026.

Executive Order 14402 of April 30, 2026 also requires a written justification to the agency head for any federal cost-reimbursement contract, plus the agency head's written approval above $10 million ($25 million at Homeland Security, $35 million at NASA, $100 million at Defense), with exceptions such as emergency response and research. If you bid federal work, check the current FAR.

The open-book records a cost-plus contractor needs

Open book means the owner sees the contractor's actual costs, not just a price. AIA's A103-2017 requires the contractor to keep full and detailed records of the cost of the work, lets the owner and its auditors audit and copy them during business hours on reasonable notice, and requires the contractor to keep those records for three years after final payment, or longer if the law requires (AIA's 2017 vs 2007 comparison of the form shows the wording). The accounting and control systems must also be satisfactory to the owner.

In practice, that means a file for every job with:

• A job cost ledger tying every cost to the job and a construction cost code, the category of work it belongs to
• Payroll records showing each worker's hours on the job, pay rate, and the taxes, insurance and benefits added on top
• Supplier invoices and receipts, with returns and credits recorded against the same job
• Subcontracts, subcontractor invoices and proof of payment
• Rental agreements, plus the rate charged for any equipment the contractor owns
• Change orders and the owner's written approvals for anything that needs one

Two rules in the AIA form trip up contractors. Buying from a related company, such as a supply business owned by the contractor's owner, needs the owner's written authorization before the purchase. And a subcontract can't be awarded on a cost-plus basis without the owner's prior written approval. If it is, the owner gets the same audit rights over that sub.

Keeping a cost-plus job audit-ready

The audit file gets built one purchase at a time, and a receipt that never leaves the truck is a cost you may struggle to prove. Clyr works with the cards a business already has: when a card is swiped, the cardholder gets a text, replies with a photo of the receipt, and the expense is coded to the job and cost code.

With billable expenses, any expense or single line of a split can be flagged billable with its own billing amount. For the audit file, the report builder exports to Excel, with the receipts in one PDF bundle.

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