Cost-plus Contract
Definition and meaning of Cost-plus Contract in real estate.
A cost-plus contract is a construction agreement where the buyer pays the builder for all direct project costs plus an additional fee or percentage for the builder's overhead and profit.
In more detail
This arrangement is frequently used in custom home building or major renovations where the final scope of work is difficult to estimate upfront. Lenders often review these contracts closely during the construction loan approval process to ensure adequate contingency funds. The direct costs typically include labor, materials, permits, and subcontractor fees, which the builder must document with receipts.
While this contract offers flexibility to make changes during construction, it presents a risk for the buyer, who may face higher costs than originally anticipated if material prices rise.
Key facts
| Category | Property Types & Construction |
|---|---|
| Fee structure | Actual project expenses plus a fixed fee or percentage markup |
| Risk level | High for the buyer, low for the builder |
| Best suited for | Custom builds, historic renovations, and complex projects |
A homeowner hires a builder under a cost-plus contract to construct a custom house, agreeing to pay the actual cost of lumber, concrete, and labor, plus a fifteen percent builder markup.
Frequently asked questions
How does a cost-plus contract differ from a fixed-price contract?
A cost-plus contract bases the final price on the actual expenses incurred plus a builder fee, whereas a fixed-price contract sets a single, locked-in price for the entire project regardless of the builder's actual costs.
How can a buyer control expenses in a cost-plus contract?
A buyer can control expenses by negotiating a guaranteed maximum price clause, which establishes a cost ceiling that the builder cannot exceed without written approval.