A cost-plus contract reimburses the contractor for the actual cost of the work and adds a fee, either a fixed sum or a percentage of that cost. It is used when the scope is uncertain, for example emergency repairs or work that cannot be fully designed in advance. In UK practice the same idea is called cost reimbursable or prime cost.
Worked example
A contractor carries out a repair under a cost-plus contract with a 12% fee on allowable cost:
| Item | Amount |
|---|---|
| Labour, including on-costs | £31,500 |
| Materials | £18,200 |
| Subcontractor and plant hire | £14,300 |
| Allowable cost | £64,000 |
| Fee at 12% | £7,680 |
| Amount payable | £71,680 |
If a further £5,000 of cost is incurred, the fee rises by £600. That is why clients prefer a fixed fee, a cap on the total, or a rule that the contractor is not paid a fee on costs it caused.
Cost-plus in the cost report
Margin on cost-plus work is the fee less any cost that cannot be recovered. The risk is not overspending against a budget but disallowed cost: a cost the Client decides is not allowable, such as rework, an unapproved subcontractor or overtime without agreement. Each month the claim should show only allowable cost, supported by invoices, timesheets and payslips.
The contractor's cost report must therefore split costs into recoverable and not recoverable. A £3,000 invoice with no supporting order might be disputed at audit, so it sits in a risk column until it is cleared. Keep orders, delivery notes and timesheets for every claim, because most cost-plus contracts give the client open-book audit rights.
Related terms
Time and Materials (T&M) Contract, Guaranteed Maximum Price (GMP) Contract, Target Cost Contract, Lump Sum Contract, Billable Rates, Pass-Through Costs.
Planyard's job costing holds every order and invoice against the job, so a contractor can show the cost behind a claim and spot items that may not be recoverable.
