What Contractors Get Wrong About Cost Plus (And How to Make It Work)

Cost plus contracts sound like a win-win:

The builder gets paid for all costs, plus a markup.

The client gets transparency and flexibility.

‍

But in reality, cost plus jobs often go off the rails: blown budgets, misaligned expectations, and profit margins that vanish under a pile of untracked receipts.

‍

The problem isn’t the contract structure. It’s the execution.

‍

Here’s what most contractors get wrong about cost plus, and how to run these projects the right way.

Misconception #1: "It’s Lower Risk for Us"

At first glance, it feels like you’re protected. If something costs more, you just bill for it, right? Not exactly.

‍

Cost plus jobs carry a different kind of risk:

• Clients scrutinize everything
• Every receipt, markup, and sub invoice needs backup
• Missed documentation = unbillable expenses
• Disorganized tracking erodes trust fast

‍

If your financials aren’t clean, you’re not protected—you’re exposed.

‍

“On cost plus, you're not just building the house. You're managing the client's confidence- every single week.” -Thomas Joseph, Joseph Design Build

Misconception #2: "We’ll Reconcile Later"

Builders often start strong, then fall behind:

• Receipts pile up
• Approvals get delayed
• Markup calculations aren’t documented
• Clients ask for reports you can’t generate

‍

By the time you try to “catch up,” you’ve already lost margin and client trust.

‍

Cost plus doesn’t give you room to guess or estimate. It requires real-time tracking.

Misconception #3: "Markup = Margin"

This is a dangerous one.

‍

A 20% markup on cost does not equal a 20% profit margin.

If your fee is based on markup, but overhead isn’t accounted for or tracked separately, your real margin can drop fast.

‍

For example:

• $100,000 in costs + 20% markup = $120,000 contract
• But with $15K in untracked overhead?
• You’ve just made 5%, not 20%

‍

Smart contractors running cost plus jobs know: markup must be paired with tight cost control and visibility.

How to Make Cost Plus Work

If you want to win with cost plus contracts, build these into your process:

1. Live Job Costing

Every expense should hit the job in real time, tagged with the correct cost code and ready to bill. No backtracking, no spreadsheets.

2. Clear Backup & Transparency

Clients expect (and deserve) visibility. Build trust by showing them:

• Receipts, bills, and approvals
• Real-time budget vs. actual tracking
• Where every dollar is going

‍

If they don’t have to ask, you’re doing it right.

3. Tight Approval Flows

Only bill what’s approved. Streamline your internal process so bills, POs, and change orders are tracked, approved, and documented before they hit the draw.

4. Weekly Reporting to Clients

Don’t let weeks go by without updates. Weekly snapshots keep everyone aligned and reduce billing pushback later.

5. Treat Overhead Separately

Make sure your markup structure includes enough to cover your real operating costs or separate them explicitly in the contract.

‍