Definition
Cost-plus pricing is an arrangement in which the client pays the provider's actual costs for a project plus an agreed fee, either a percentage of costs or a fixed amount, to cover overhead and profit. It is common in construction, government contracts, and custom manufacturing where costs are hard to predict.
Also called: Cost-plus contract, Cost plus fee, Cost-plus
Cost-plus pricing in practice
Cost-plus contracts require transparency. The client normally has the right to see invoices, receipts, payroll records, and subcontractor bills that support each cost, so keep them organized by project.
Variations include cost plus a percentage, cost plus a fixed fee, and cost plus a fee with a guaranteed maximum price, which caps the total the client can pay.
As a general pricing method, cost-plus also describes setting a product price by adding a standard markup to its unit cost.
Example
A builder agrees cost plus 12 percent on a kitchen remodel. Costs for the month are $28,000 in materials and subcontractors, so the invoice is $28,000 plus a $3,360 fee, totaling $31,360.
Frequently Asked Questions
What is the difference between cost-plus and time and materials?
They are similar. T&M bills labor at set hourly rates that already include profit, plus materials. Cost-plus bills all actual costs, including labor at cost, plus a separate fee.
What is a guaranteed maximum price?
A cap on the total a client will pay under a cost-plus contract. Costs above the cap are absorbed by the contractor, and savings below it are sometimes shared.
Related terms
- Markup Markup is the amount added to the cost of materials, subcontractors, or expenses when they are billed to a client, expressed as a percentage of cost.
- Time and materials Time and materials (T&M) is a pricing arrangement in which the client pays for the actual hours worked at agreed rates plus the actual cost of materials, often with a markup.
- Fixed-price contract A fixed-price contract sets one total price for a defined scope of work, regardless of how many hours or how much material it actually takes.
- Not-to-exceed A not-to-exceed (NTE) amount is a maximum price written into a time and materials or hourly agreement.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.