The 28 Top Questions You've Asked About Cost Plus Construction - Answered in Plain English
Thinking about using a cost-plus contract but not sure what you're getting into?
You're not alone. Whether you're new to cost-plus or have used it before, undoubtedly, you've got questions, like:
How to explain it to clients.
What to include in your markup.
How to handle billing, track costs, and avoid getting burned when things change mid-project.
That's why we've rounded up 28 of the most common questions builders ask about cost-plus construction—and answered them in plain language. From how to track job costs to what to include in your markup, this guide gives you the clarity you need to run smoother, more transparent projects.
Let's get into it.
1. How Exactly Does A Cost‑plus Contract Work?
In a cost-plus contract, the client pays for the actual cost of the project — including labor, materials, trade invoices, and any job-related expenses — plus a markup that covers your overhead and profit.
Cost-plus gives you the flexibility to move forward without waiting for finalized selections or perfect drawings. It protects you financially if the scope changes or if pricing shifts due to material volatility. The client gets transparency, you get protection, and both sides maintain flexibility.
Here's how it works:
You track and document every dollar spent (labor, trades, materials, rentals, permits, etc.).
You add a pre-agreed markup — a fixed percentage — on top of all billable costs.
You invoice weekly or biweekly with supporting documentation, providing real-time updates on budget status and remaining funds.
You provide open-book visibility — clients see exactly where their money is going, which builds trust and helps avoid disputes.
The only category treated differently is self-performed labor, where a layered markup structure applies (covered in Q9).
2. What's A Normal Percentage Markup? Does It Change For Big Jobs Or Expensive Materials?
Most professional builders using cost-plus in the residential construction industry apply a markup between 15% and 25%. Even 25% is considered the upper limit and is only justifiable when your financials demand it. The sweet spot for most remodelers and custom builders tends to fall in the 15–20% range.
On very large construction projects (e.g., multi-million-dollar custom builds), it may be appropriate to apply a slightly lower markup due to economies of scale — but only if your required gross margin is still met. This isn't about discounting; it's about maintaining financial integrity.
What you don't do is adjust your markup based on material pricing, client pressure, or fear of losing the job. Your markup is a function of your overhead, your profit goals, and your risk exposure. You either hit that margin or you don't take the job.
3. Do Vendors Submit Actual Costs For Reimbursement?
Yes. In cost-plus, vendors (material suppliers) and trades submit invoices to you — not the homeowner. These invoices reflect their pricing, which includes their own internal overhead and profit (as it should — they're running businesses too).
As the builder, you compile and organize these as billable expenses, apply your markup on top, and include them in your client invoice. You're not dissecting their pricing or stripping out their margin. Your markup exists in addition to their price — to cover your costs of coordination, administration, and financial responsibility.
4. Are Appliances Or Subs Included In The Cost‑plus Fee?
Yes. Any trade, supplier, or product that supports the project — including appliances — is treated as a billable expense unless explicitly excluded in writing.
However, appliances fall into a special category. While you manage the selection, coordination, and installation, the client typically purchases them directly. This ensures warranties are registered in their name and avoids unnecessary liability on your part. The same applies to window treatments, electrical light fixtures (e.g., chandeliers), and soft furnishings.
Everything else — materials, trades, rentals, and builder-supplied items — should flow through your procurement process with markup applied.
5. Is It Normal For A Contractor Not To Break Down Costs?
Not in cost-plus. These construction contracts are based on transparency. Clients should see a breakdown of labor, materials, subs, and any other job-related expenses within every invoicing package.
You don't need to list every screw, but you do need to group costs meaningfully — think framing, finishes, electrical, and grouped by the cost of goods it belongs to (labor, materials, and trades). Clear documentation builds trust, and Buildwise is the only cost-plus purpose-built software on the market.
The more open you are, the more trust you build. That is what makes the cost-plus method work.
6. What Are The Advantages And Disadvantages Of Cost‑plus vs. Fixed Price?
Both models can work, but they come with different risks and rewards. Here's a quick breakdown to help you compare.
Cost-plus Advantages:
Eliminates your risk of underestimating unknowns
Flexible to proceed without finalized specs or drawings
Builds trust through open-book transparency
Encourages collaboration with the client
Cost-plus Disadvantages:
Clients may experience uncertainty about the final cost
Requires strong communication and disciplined tracking
Builder must educate clients to avoid surprises
Fixed-Price Advantages:
Clients get upfront price certainty
Easier to market and sell to budget-conscious clients
Potential for higher margins if you manage allowances well
Fixed-Price Disadvantages:
You absorb cost overruns
Change orders are harder to negotiate if communication breaks down
More adversarial dynamic if trust is low
7. How Are Costs Tracked (Timesheets, Accounting, Software)?
Accurate tracking is everything in cost-plus. You need to capture labor hours, vendor invoices, and subs in real time.
Spreadsheets and generic accounting software aren't built for this. Buildwise helps you:
Track labor using our industry-leading time tracker
Upload vendor and sub-contractor invoices
Sync with client-facing budget tracking
8. How Are Mistakes Or Overruns Handled In Cost‑plus?
In cost-plus, overruns are billed to the client. That means if the project takes longer or the materials and trades cost more, then the client pays for these increases.
But not all mistakes are treated the same.
Reasonable errors (e.g., site adjustments) are client-paid.
Grievous errors (e.g., poor workmanship, clear negligence) are absorbed by the builder.
It's critical to clarify this distinction in your contract. For more on what the differences are between the different types of errors, see here.
9. Does Contractor Self-Performance Count Toward Markup?
Yes. Any work your own crew performs—framing, trim, site cleanup, etc.—is treated just like any other cost in a cost-plus project.
Labor is billed at a burdened rate, which includes not just wages but all associated costs: payroll taxes, workers' compensation, liability insurance, and any other direct labor overhead. That burdened rate is then marked up to a charge rate that reflects the full cost and contribution of having your own team on site. For example:
Burdened rate = $25/hr
Markup = 50%
Charge rate = $37.50/hr
That 50% markup yields a 33% gross margin on labor before the additional project-level markup is applied.
This creates a layered markup effect. First, you generate margin between the burdened rate and the charge rate. Then, the entire labor cost (now at the charge rate) is included on the client invoice and subjected to the project's overall markup, just like any other cost. That second layer significantly boosts your profitability on self-performed work.
Builders typically approach this in one of two ways:
Schedule of rates: Different roles have different charge rates (e.g., $40/hr for laborers, $55/hr for carpenters, $70/hr for a site supervisor).
Unified rate: Everyone is billed at a single charge rate, often set higher to ensure consistency and protect margins.
This system is one of the core reasons cost-plus is so effective for companies with in-house field crews: it rewards operational efficiency while giving you consistent margin contribution on labor—something that's hard to achieve in fixed-price work.
10. Should I Get Second Quotes For Big-Ticket Items Under Cost‑plus?
Yes — but you do it proactively, not because the client demands it.
On big-ticket items like HVAC, cabinetry, or windows, getting multiple quotes shows the client you're doing your due diligence. But your recommendation should always be rooted in best value, not just lowest price.
Explain to clients:
"We work with subs who show up, answer their phones, warranty their work, and coordinate efficiently. That's what you're paying for. I can get three quotes, but the cheapest one is rarely the best value."
Clients hire you to be the filter — not just a pass-through for options.
11. What Is A Cost‑plus Contract?
In a cost-plus construction agreement, homeowners pay the actual project costs—materials, labor, and trade partners—plus a markup that covers the builder's overhead and profit.
For every dollar spent, the client pays $1.XX, with "XX" being the builder's markup.
This approach reduces risk for contractors by allowing them to begin work without firm pricing for every item, ensuring their margin is protected. Clients benefit from transparency, but trade that for less certainty around the final project cost.
12. When Should You Use Cost‑plus?
Cost-plus contracts are a great fit for custom home builds, remodels with an unclear scope, or projects where material choices might change along the way. They work well when the project details aren't fully settled at the start, giving the client and builder flexibility as things evolve.
Cost Plus is also ideal for clients who value transparency and want to see exactly how their money is spent on labor, materials, and trades. Cost-plus contracts offer the flexibility and openness needed to handle unexpected changes while keeping everything clear and transparent between the builder and the client.
13. What's The History Of Cost‑plus Contracts?
Cost-plus contracts originated in large, complex commercial and government projects where pricing was difficult to predict. They've since become popular in residential building due to the flexibility and clarity they provide.
14. What Markup Do Builders Use On Subcontractor Work?
Builders typically apply a markup of 15% to 25% on subcontractor work, depending on the size and complexity of the project, their overhead needs, and local market conditions. This markup contributes to the builders' calculated overhead and net profit goals.. The exact percentage can vary, but the goal is to ensure you're not just passing costs through—you're getting paid for the time and liability you take on when managing that part of the job.
15. Do You Markup Labor and Materials Separately?
No. Use one consistent markup across all cost categories. Separate markups introduce confusion and weaken your pricing strategy. Your overhead and profit targets should drive one unified markup. For more on pricing and estimating for cost plus, check out lesson #9 on our 22 Lessons Of Estimating YouTube video.
16. How Are Overhead And Profit Calculated?
Overhead is typically 5–15% and covers general business expenses like office staff, insurance, software, and marketing. Net profit should be targeted at 8–10%, representing the actual return to the business after all costs are covered. Combined, your markup on Cost Plus projects should be set to ensure you're hitting both targets based on your total cost of goods sold.
For most builders:
Overhead = 5–15%
Net Profit = 8–10%
If you want to hit a 10% net and cover 15% overhead, you need a 25% gross profit margin — which requires a 33% markup on costs.
If your markup doesn't cover that, you're undercharging. Full stop.
To do that, you need to actively track your overhead in real time—ideally on a monthly basis—so you know what your business truly needs to stay healthy and profitable. The markup you apply to cost-plus invoices isn't arbitrary; it needs to be intentionally designed to contribute first to covering overhead, and then to achieving your net profit target. Without that visibility and planning, you risk undercharging and eroding your margins over time.
17. How Do Vendors Submit Labor Costs?
It's very uncommon for trades to submit labor or track their time using furnished timesheets. That's not how the relationship typically works between a general contractor, remodeler, or custom home builder and a specialty trade like an electrician or plumber. Instead, trades invoice based on a draw schedule tied to their contracted scope of work, not by logging hours or labor line items.
18. Do You Bill The Actual Hourly Wage Or the Agreed Rate?
In cost-plus jobs, you bill the agreed rate, commonly known as the Charge Rate, and not the base hourly wage. But it's important to understand that there are two distinct labor rates in cost-plus work:
Pay Rate – This is your fully burdened internal cost for an employee. It includes their base wage plus payroll taxes, workers' compensation, insurance, and any other direct labor-related costs. This is what it actually costs you to put that person on the job.
Charge Rate – This is what you bill the client. It's calculated by applying a markup to the pay rate. That markup can vary based on your business model. Some companies create a schedule of charge rates with different rates for different roles (e.g., apprentice vs. lead carpenter), while others use a unified charge rate where all labor is billed at one consistent rate.
The charge rate is what gets itemized on client invoices—and it's also subject to your project-level markup. This creates a layered markup approach, where labor earns margin both through the charge rate and the project markup. It's one of the key advantages of cost-plus jobs, especially for builders with in-house field staff, because it allows for a stronger contribution to profit on labor.
If you haven't already, define your labor billing method clearly in the contract. That way, expectations are aligned, and clients understand what they're paying for and why.
19. Do Vendors Bill Indirect Costs (Like Overhead)?
No. You won't see a line item for overhead. But make no mistake — it's baked into their pricing. Your markup is applied on top of that to reflect your coordination and liability.
20. Are Timesheets Required Each Month?
There's a line between transparency and overexposure in cost-plus projects. While it's an open-book model, sharing detailed timesheets with clients—especially with exact hours—can lead to unnecessary scrutiny. If a client drops by and doesn't see someone on-site when the timesheet says they were, it can erode trust. This is especially true for roles like supers or PMs who may be working remotely or moving between jobs.
Internally, daily timesheets are non-negotiable. There's no substitute for tracking labor in real time. Accurate, daily entries protect your margin, ensure job cost accuracy, and give you solid backup for billing. But they're for internal control—not for client review. Each invoicing package should include material receipts and trade partner invoices to provide transparency without inviting confusion.
If you're still chasing down paper timesheets or trying to make sense of messy spreadsheets, try Buildwise. Its built-in time tracking system is designed for residential contractors, featuring simple mobile entry, approval workflows, and seamless integration into your cost-plus invoicing.
It saves time, reduces errors, and keeps you covered when it's time to bill.
21. What Software Do Builders Use For Cost Tracking?
There's a lot of construction software out there, but most of it isn't built with cost-plus in mind.
Off-the-shelf platforms tend to focus on fixed-price jobs or commercial work, where you're working from a set contract and a rigid budget. That might check some boxes on paper, but it doesn't give you what you need to run a residential project where costs evolve and transparency is key.
If you're a custom builder or remodeler working under a cost-plus model, you need more than basic job costing. You need to track actual costs in real time, link expenses to the right categories, document labor hours clearly, and show clients exactly where their money's going—without spending hours pulling reports or fixing spreadsheets.
That's where Buildwise comes in. It's designed specifically for residential builders running cost-plus projects. With Buildwise, you get:
Real-time cost tracking tied directly to your budget and contract structure
Receipt and trade invoice uploads, so you can bill accurately and on time
Client-facing reporting that's easy to share and understand
Integrated time tracking, so crew hours flow straight into your project costs
Custom categories and markup settings, built around how you actually estimate and bill
Simple QuickBooks online integration to push all of that documentation downstream, the way it should be.
You don't have to force your process into a system that wasn't made for it. With Buildwise, you get a platform that fits how you work—saving you time, improving accuracy, and giving your clients the clarity they expect from a cost-plus build.
22. Are Appliances Always Included?
No. Appliances, window treatments, electrical light fixtures (think chandeliers), and soft furnishings are client-purchased and are the only exceptions. But you still manage the coordination, delivery, and install timeline. You will charge your markup only on the coordination and installations, but the end user warranties are with the homeowner and not you, the builder.
23. Can Homeowners Supply Materials And Avoid Markup?
Homeowners often want to supply their own materials to save money and skip the builder's markup. But it's important to help them understand why that usually isn't possible—and why it's not just about the price tag.
That said, legally, in both the U.S. and Canada, a homeowner can supply materials. But you are never obligated to accept that model. You have every right to walk away from a project if the client insists on handling procurement.
You — the builder — must control material procurement. That protects:
Schedule
Quality
Warranty
Handling
Your markup structure
The only exceptions are appliances, electrical light fixtures, soft furnishings, and window treatments.
When you don't purchase the materials yourself, you can't take full responsibility for managing them. That means you're not in charge of ordering, inspecting, storing, or handling delivery issues. Without control over these steps, it's tough to guarantee materials will arrive on time, be the right quality, or even be on site when needed.
You also can't provide a warranty or stand behind materials you didn't buy. If something fails or doesn't fit, the blame often falls on the builder, but without ownership of the purchase, your options to fix problems get limited—and the project can suffer delays and extra costs.
For more on how to explain why you need to handle the procurement process for any residential construction project, click here.
24. How Are Extras Handled?
Best practice is to reconcile any additional costs—whether due to scope changes, major variances, or client requests—through a formal change order. This keeps the budget accurate, protects your margin, and ensures alignment with the client before work proceeds.
But not all extras are created equal—and not all of them require a formal document. In cost-plus projects, extras generally fall into three categories:
Minor Variances – A slight overage in materials or labor, often due to market pricing or scope clarification. These are usually absorbed into the ongoing budget tracking and don't require a change order.
Major Variances – Significant cost changes that impact the budget or scope meaningfully. These do require a written change order with updated pricing and client approval.
Errors – When something is missed, done incorrectly, or has to be redone. These can be minor (absorbed by the builder) or grievous (re-billed or re-negotiated with transparency). See Question #2 for more on how errors are categorized and handled.
Your process should always follow the same disciplined structure for major variances and client-driven changes:
Price the change
Get written approval (email or signed doc)
Update the budget
Execute the work
Verbal changes erode trust and destroy profitability. Even in a flexible, open-book model like cost-plus, you need a clear boundary between what's tracked internally and what's been formally agreed upon with the client.
25. Who Pays For Mistakes Or Rework?
In cost-plus construction, determining who pays for mistakes or rework depends on the nature of the error and where responsibility lies, making it important to clearly distinguish between reasonable errors and grievous errors from the start.
Reasonable errors are minor mistakes or unforeseen issues that naturally happen during a project. These can include small measurement differences, unexpected site conditions, or minor adjustments needed as work progresses. Because these are normal and unavoidable, the client covers the cost of fixing them under the cost-plus agreement.
Grievous errors are serious mistakes caused by negligence, poor workmanship, or avoidable oversights by the builder or subcontractors. These errors lead to significant rework or delays and are often the builder's responsibility to fix at no additional cost. Absorbing these costs helps protect your reputation and shows your commitment to quality; however, it should be exercised with extreme caution.
If mistakes result from the client's late changes, unclear decisions, or failure to provide necessary information, those costs typically fall on the homeowner.
Having these distinctions clearly spelled out in your contract and conversations sets fair expectations and protects both you and your client throughout the project.
One key is to build this into the margin you charge, as the generally accepted metric is that 2-3% of a project cost will result in errors or rework. This way, if a situation presents itself, you're already covered.
Learn more about errors and who pays for them here.
26. What About Excess Materials?
Excess materials are a common concern on cost-plus projects, and how they're handled depends largely on your agreement with the client.
Typically, materials purchased but not used remain the client's property since they've paid for the actual costs plus markup.
It's important to track these materials carefully throughout the job. If excess materials can be returned for credit, you should pass those savings back to the client. If they can't be returned, you'll need to discuss options with the homeowner—sometimes leftover materials get used for touch-ups or future repairs.
Clear communication upfront about how excess materials will be managed helps avoid confusion or disputes later. Keeping detailed records and receipts ensures transparency and helps build trust, which is especially important in cost-plus construction where every dollar counts.
27. Cost‑plus Vs Fixed Price – Which Is Better?
When deciding between cost-plus and fixed price (or fixed fee or fixed bid), you need to consider how each approach affects risk, project control, and client expectations. Neither is automatically better—it all depends on the type of project and how comfortable you are managing costs and changes.
Fixed price contracts give your clients a clear, upfront number. This can be attractive because it offers cost certainty and simplifies budgeting. However, as the contractor, you take on most of the risk. If unexpected issues arise, materials cost more than expected, or the project scope changes, you may end up covering those extra expenses unless you negotiate change orders. Fixed price works best on well-defined projects, with minimal unknowns, and where the scope is unlikely to shift.
Cost-plus contracts allow you to bill for actual costs plus a predetermined fee or percentage. This means you get paid for the work and materials you use, which protects you from underestimating or unforeseen problems. Cost-plus requires strong communication with your client since they will see real-time costs, and decisions can directly impact the budget. It also demands careful record keeping and transparency to maintain trust. This model works especially well for complex or custom projects where the scope is likely to evolve and unexpected costs may arise.
Here's a quick comparison to help you decide which fits your situation:
Ultimately, the choice comes down to your comfort level with managing risk and how much control you want over project costs. If you have strong systems to track and communicate costs, cost-plus can protect your margins and reduce financial stress. But if the project is straightforward and you want simplicity, a fixed price might be the better fit.
28. Which Contract Type Limits Owner Risk?
When it comes to limiting the owner's risk, fixed-price contracts are generally the safer option. With a total price set upfront, the owner has cost certainty and is protected from unexpected increases in labor, materials, or delays—assuming no major changes are made.
However, fixed-price contracts carry their own risks. Builders may feel pressure to protect their margin, which can lead to rushing the job, cutting corners, or providing a less-than-ideal client experience.
Cost-plus contracts shift more financial risk to the owner, who agrees to cover actual costs plus a fee. If the project runs longer or requires more materials, the final cost increases accordingly. While this model allows for greater flexibility and transparency, it requires the owner to carry more of the budget risk.
When you explain contract options to owners, keep in mind that fixed-price agreements limit their financial risk by locking in the project cost up front. Cost-plus contracts offer more flexibility but shift more of the budget risk to the owner since costs can change as the project unfolds. Knowing how each contract handles risk helps you recommend the best fit for the project and the client's comfort level.
After answering the 28 top questions about cost-plus construction, you're in a stronger position to handle this contract type with confidence. You understand how cost-plus compares to fixed cost, what risks to watch for, how markups and cost tracking really work, and how to manage changes without losing control. This knowledge helps you communicate clearly with clients, protect your margins, and keep projects running smoothly—even when unexpected issues come up.
When managed properly, cost-plus can be one of the most effective billing models for remodelers and residential contractors.
If you want to protect your margins, communicate clearly with clients, and build a system that actually works, this is your next step. Join the COST-PLUS MASTERCLASS, a focused training built for builders who want real strategies, not fluff. Learn how to price, bill, and run projects with confidence.
