Cost-Plus Contracts Explained: How Transparent Pricing Builds Trust

When you’re building or remodeling a home, choosing the right contract can make all the difference. The type you sign defines how costs are managed, how much flexibility you’ll have during the project, and how risk is shared between you and your general contractor. In this post, we’ll break down two common construction contract types—cost-plus and hard bid—and explain why we most often use a cost-plus model to keep projects on track by keeping costs transparent and value high.

Cost-plus vs. Hard Bid

A hard bid contract (sometimes called a lump sum) is a fixed-price agreement in which a contractor commits to completing a project for a set amount based on detailed plans and specifications provided by the homeowner or architect. Before work begins, the contractor calculates all anticipated costs—including labor, materials, subcontractors, overhead, and profit—and submits a firm price. These types of contracts are common in civil and commercial work where the level of detail involved with plans and specifications is very high.

A cost-plus contract is where the homeowner pays for the actual cost, plus a markup, rather than a fixed lump sum. Labor is billed at agreed-upon hourly rates for different trades, while materials (including vendor and subcontractor invoices) are charged at cost with a markup to cover profit and overhead. This type of contract is especially useful in remodels or custom projects where conditions are unpredictable and the scope often evolves during construction.

Why we use Cost-Plus Contracts

We prefer to use cost-plus contracts (also known as cost-plus fee) because they provide the flexibility and transparency that complex, high-quality residential projects demand. Unlike fixed-price agreements, cost-plus contracts allow us to adapt to unforeseen circumstances and evolving design decisions without sacrificing quality or craftsmanship. Homeowners can see exactly where their money is going, with detailed invoices for labor hours and material costs, fostering trust and collaboration throughout the project. This approach ensures that every decision—whether selecting a custom finish or addressing hidden structural issues—can be made thoughtfully rather than rushed to stay under a fixed budget.  In these contract models, customers truly “get what they pay for.”

Building trust: How We Address Concerns

While we value the transparency and flexibility of a cost-plus contract, we know it only works when homeowners have full trust in our process and expertise. To ensure that trust, we’ve developed a workflow that keeps us accountable while still allowing us to tackle challenges as they arise. Here are a few ways we maintain transparency and build confidence throughout every project:

• Communication: We have a saying we like to repeat: “Bad news doesn’t get better with time.” When an issue arises—whether it’s a material on backorder or hidden rot behind the walls—we let the homeowner know right away. If additional labor is required to address the problem or a change order becomes necessary, we make sure you’re informed upfront so there are no surprise bills.
• Daily Logs: At the end of each day, our Site Leads post updates to JobTread, our online project platform. These updates include detailed notes, photos of the work completed, subcontractor activity, and other important information. This keeps homeowners fully informed about our progress while also creating a thorough record of the entire construction process.
• End-of-Week Updates : We provide updates at the end of each week (we refer to them as EOWUs), which include a summary of work completed that week, decisions needed, milestones met, as well as a list of any potential cost impacts (PCIs). PCIs may be additive or deductive to a budget, but their intent is to keep the project team apprised of any new information affecting the project cost. If approved, they’ll become an official change order.
• Change Orders: Scope modifications and additions during construction—also known as “change orders”—are both common and anticipated. Clients may become enthusiastic about the evolving project and often propose additional scope items or fixtures and finishes upgrades. While we make every effort to stay true to the original vision, circumstances often change during construction. A cost-plus contract allows us to respond to these changes without having to renegotiate the contract.
• Contingencies: A cost contingency is a budget reserve set aside to cover unexpected expenses, changes in project scope, or upgrades clients may choose along the way. Common uses include unforeseen site conditions, material or labor cost changes, regulatory updates, and selection of higher-end finishes. Typically 5–10% of the project cost, the contingency provides a cushion for cost overruns. At TBB, we apply contingency transparently to both your ideal and maximum budgets, so you can see how decisions and unexpected issues impact costs, helping you make informed choices throughout the project. These can either be built into the estimates, or an agreed upon value outside of the construction control budget.

Why We Don’t Use Hard Bid Contracts

For custom homes and remodels, hard bid contracts can introduce unnecessary risk and limit flexibility. Fixed-price agreements work best when every detail is finalized and predictable—but in nearly all custom projects, plans evolve, materials change, and hidden conditions often surface once construction begins. Relying on a hard bid in these situations can lead to costly change orders, unexpected surprises, or compromises in quality. To account for this, builders must increase their bids to cover potential risks and cost overruns. Moreover, under lump-sum agreements, builders might opt for lower-quality materials or hire sub-par subcontractors who offer the lowest bids to boost their profit margins. While an initial low bid may seem appealing, it often doesn’t reflect the true reality and complexity of a construction project.

What’s in the Overhead?

Now that we’ve covered the basics of our contract model, you might be wondering: what does the markup cover? It’s a fair question, and understanding it can give you confidence in the transparency of this approach. Here’s a look at where that money is going:

• Insurance and bonds: Commercial general liability insurance, worker’s compensation, and bonding fees are often required by law or contract.
• Office and administrative costs: Behind-the-scenes expenses like rent, utilities, software subscriptions, and wages for non-billable staff.
• Equipment maintenance and depreciation: Regular upkeep, repairs, insurance policies for our vehicle fleet, and eventual replacement of tools, trucks, and other equipment.
• Marketing and business development: Website upkeep, advertising, networking, and outreach to secure new projects and make industry connections.
• Accounting and legal fees: Bookkeeping, payroll taxes, and legal guidance as needed.
• A note on sales tax: Washington State sales tax is remitted monthly to the state based on gross sales. We utilize a reseller’s permit to remove sales tax from material, subcontractor and vendor receipts, and then add sales tax ONCE to the bottom line of the bi-monthly client invoices. Sales tax is typically 10% of the total project cost, and all our estimate bottom lines include sales tax—that way it’s not an added surprise to our clients.

Even with a markup, overhead costs can quickly eat into a contractor’s profit. Industry-wide, the construction sector realizes net profits averaging 3-6%. While smaller, specialty niches may see higher margins, it’s no surprise that most construction businesses don’t last for more than five years. To put this in perspective, here’s how our net profit margin stacks up against other industries (data compiled by the NYU Stern School of Business, January 2025):

• Real estate development: 12%
• Software (systems and applications):94%
• Healthcare products:73%
• Financial services:28%

This slim cushion means there’s very little room for error—any unexpected cost or miscalculation can turn a project into a loss. Overhead, cash flow hiccups, and delays make construction a notoriously low-margin industry. That’s why a cost-plus contract can be so valuable—it accounts for these variables, ensuring the contractor is covered while the client only pays for the work actually performed, protecting both sides from unexpected costs.

We take great pride in our work and products. We believe skilled craftsmanship deserves respect, and we’re committed to giving credit where its due—to those who work in the trades and provide these essential services.

Remember that while rates and fees can seem high, you’re paying for the expertise of a professional business to manage and build your most important asset—your home. As the saying goes, “Skilled labor is not cheap, and cheap labor is not skilled.” When everyone on a project works with trust, transparency, and confidence in one another, the result is a successful, well-executed build.