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Cost Plus Construction Contract Template (Free Download + AI Generator)
Greg Mitchell | Legal consultant at AI Lawyer
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A Cost Plus Construction Contract is a legal agreement where the project owner agrees to reimburse the contractor for approved construction costs and pay an additional fee on top of those costs. This structure is commonly used when project scope is still developing or when cost certainty is difficult to achieve at the start.
Construction projects continue to struggle with predictability. According to McKinsey & Company, large construction projects are completed 20% later than scheduled and can exceed budgets by up to 80%, largely due to scope changes and poor cost visibility. This reality has pushed many owners toward more transparent contract models like cost-plus.
Download the free Cost Plus Construction Contract Template or customize one with our AI Generator, then have a local attorney review before you sign.
1. What Is a Cost Plus Construction Contract?
A Cost Plus Construction Contract is a pricing and documentation framework where the owner pays:
the Cost of the Work (reimbursable job costs), plus
a Contractor Fee (the “plus”), which is typically a fixed fee, a percentage, or a hybrid.
This is different from a fixed-price contract where the contractor bids one total number upfront. With cost-plus, the “deal” is not just the price approach. The deal is the system: what costs are allowed, how they are proved, how approvals work, and how disputes are handled.
Cost-plus works best when transparency is paired with guardrails. One common guardrail is a Guaranteed Maximum Price (GMP), which sets a ceiling on what the owner pays (subject to agreed change rules). AIA’s A102-2017 is a widely recognized standard form that is specifically for “Cost of the Work Plus a Fee with a Guaranteed Maximum Price,” which shows how common this model is on larger or more complex jobs.
2. Why Cost Plus Construction Contracts Matter in 2026?
Cost-plus contracts matter in 2026 because flexibility without discipline is expensive, and the industry data still shows performance strain.
KPMG’s Global Construction Survey (2023) reports that 37% of respondents missed budget and/or schedule performance targets due to lack of effective risk management. That number is a reminder that projects do not fail only because of bad intentions. They fail because of unclear systems: unclear approvals, unclear cost definitions, weak reporting, and decisions made without documentation.
Standard contract frameworks also signal what “good practice” looks like. For example, AIA’s A102-2017 is designed for cost-plus-fee payment with a GMP on large projects, and it is intended to be used with broader “general conditions” language (A201). That tells owners and contractors something important: cost-plus needs structure, not vibes.
In short, a Cost Plus Construction Contract matters in 2026 because it can help teams stay flexible while still keeping a clean paper trail, clear approvals, and clearer cost accountability, if the contract is written properly and actually followed.
3. Key Clauses and Components
Parties & Effective Date: Identify the owner/client and the contractor, plus the effective date when obligations begin.
Project Description: State the project location and a plain-language description of what is being built or improved.
Scope of Work: Describe what is included and excluded, referencing drawings, specifications, or exhibits when available.
Cost of the Work: Define reimbursable costs and list exclusions so billing does not become an argument.
Contractor Fee: State whether the fee is fixed, percentage-based, or hybrid, and clarify what cost categories the fee applies to.
Guaranteed Maximum Price (If Applicable): Set a cap on total cost exposure and define how the GMP is calculated and adjusted.
Allowances & Contingency: Explain how uncertain items are budgeted, how they are approved, and what happens to unused amounts.
Billing & Payment Timing: Set billing frequency, payment deadlines, retainage (if any), and what supporting documents must be attached.
Documentation Standards: Require receipts, invoices, timesheets, and job-cost reporting in a consistent format.
Owner Approvals: Define spending thresholds and decisions that require written approval before costs are incurred.
Change Management: Explain how scope changes, substitutions, and schedule impacts are documented and priced.
Audit Rights & Record Retention: Grant the owner rights to review cost records and require retention for a stated period.
Insurance & Risk Allocation: Specify required coverage and responsibility for claims tied to the work.
Dispute Resolution: Choose the method and steps for disputes (negotiation, mediation, arbitration, or court).
Termination: Define when either party may terminate and how costs and fees are handled at termination.
4. Legal Requirements by Region
U.S. Standard Form Alignment: Many U.S. projects use or mirror standard forms, including cost-plus structures that include GMP language.
State-Level Construction Rules: Payment timing, licensing, lien rights, and consumer protections may vary by state, so local review matters.
Non-U.S. Jurisdiction Differences: Deposits, progress payment rules, and mandatory notice requirements can differ widely outside the U.S.
Financing and Lender Oversight: Lenders often require clean payment applications, backup documentation, and approval trails, so the contract should support that workflow.
Local Attorney Review: Confirm enforceability and compliance in the project’s jurisdiction before signing.
5. How to Customize Your Cost Plus Construction Contract?
Cost Categories: Tailor reimbursable and non-reimbursable costs to the project so invoices match reality.
Approval Thresholds: Set owner-approval triggers that fit the project size, such as purchase limits, overtime limits, and subcontract award thresholds.
Fee Application Rules: Clarify whether the fee applies to subcontract costs, allowances, contingency usage, and owner-directed changes.
GMP Decision: Decide whether a GMP is needed for cost certainty, and define adjustment rules if included.
Reporting Format: Require a standard job-cost report structure so reviews are consistent and fast.
Schedule and Delay Handling: Add practical rules for delays, lead times, and owner-caused impacts.
Subcontractor Standards: Require subcontractors to follow the same documentation and backup rules to prevent weak links.
6. Step-by-Step Guide to Drafting and Signing
Step 1-Set the baseline scope: Describe what is included and excluded, even if the final design will evolve.
Step 2-Define “Cost of the Work”: List reimbursable and excluded costs, and require clear supporting documentation.
Step 3-Choose the contractor fee: Pick fixed, percentage, or hybrid, and define what the fee applies to.
Step 4-Set approval thresholds: Decide what needs written owner approval, including major purchases, overtime, and subcontract awards.
Step 5-Decide on a GMP (optional): Add a cost ceiling if desired, and define how it changes through approved changes.
Step 6-Define billing and payment: Set billing frequency, backup requirements, review windows, and payment deadlines.
Step 7-Confirm audit and retention: Define record access, retention periods, and the audit process.
Step 8-Execute and store: Sign before work begins, and store the signed contract and exhibits in a secure system.
7. Tips for Cost Control, Documentation, and Approvals
Routine backup every invoice:
Require documentation with every invoice so review is normal, not confrontational.
Clear cost coding:
Use consistent cost codes so spend can be tracked against budget and scope.
Written approvals:
Confirm approvals in writing so disputes do not turn into memory contests.
Regular cost reviews:
Review costs weekly or bi-weekly to catch issues early rather than months later.
Subcontractor consistency: Require subcontractor invoices to meet the same standards so transparency is end-to-end.
8. Checklist Before You Finalize
Scope clarity: The included and excluded work is stated in plain language.
Reimbursable costs defined: Cost categories and exclusions are clear and realistic.
Fee clarity: The fee method and fee application rules are unambiguous.
Approval workflow: Owner approval triggers are practical and clearly documented.
Billing rules: Invoice format, backup requirements, and payment deadlines are stated.
Audit rights: Record access and retention requirements are included.
GMP terms (if used): GMP definition, adjustment rules, and exceptions are clearly written.
Dispute path: The dispute process is clear and workable.
Local compliance: A licensed attorney has reviewed it for local law and project realities.
Download the Full Checklist Here
9. Common Mistakes to Avoid
Treating cost-plus like unlimited spending: Without approvals and reporting, costs drift and relationships deteriorate.
Leaving cost definitions vague: If reimbursable costs are unclear, billing disputes become predictable.
Unclear fee application: Agreeing on “the fee” is not enough if the contract does not say what the fee applies to.
Approval processes that are too slow or unclear: Teams work first, ask later, and disputes follow.
Weak invoice backup standards: Cost-plus depends on transparency, and transparency depends on documentation.
Ignoring standard-form logic: Many disputes reduce when contracts reflect disciplined frameworks used in the industry.
10. FAQs
Q. When Is A Cost Plus Construction Contract A Better Fit Than Fixed Price?
A: Cost plus is often a better fit when the scope is not fully defined, when design decisions will be made during construction, or when pricing volatility makes fixed bids risky. It can also work well when the owner wants transparency and is willing to stay engaged in approvals and cost reviews, instead of “set it and forget it” pricing.
Q. Does A Cost Plus Contract Always Need A Guaranteed Maximum Price?
A: No. A GMP can add cost certainty, but it is not mandatory. Without a GMP, owners usually strengthen cost controls through tighter approval thresholds, stronger backup requirements, and clear audit rights. With a GMP, the contract must be very clear on what changes the GMP and what does not.
Q. What Costs Should Be Reimbursable In A Cost Plus Contract?
A: Reimbursable costs typically include direct labor, materials, equipment, subcontractors, permits, and jobsite services that are necessary for the work. The contract should also define exclusions, such as certain overhead items, avoidable rework, fines, or costs that were not properly approved. The exact list should be customized to the project and checked against local rules.
Q. How Can An Owner Prevent Cost Plus Billing Disputes?
A: The fastest way is to require consistent backup, standard cost codes, and a predictable approval process for major cost drivers. Regular cost reviews (weekly or bi-weekly) help catch issues early. Strong documentation and transparency matter because industry data shows projects still miss budget/schedule targets at meaningful rates, so process discipline is a real risk-control tool.
Q. Is A Cost Plus Construction Contract “More Expensive” Than Fixed Price?
A: Not automatically. Fixed price includes a risk premium because the contractor must price uncertainty upfront. Cost plus can reduce that premium, but the owner takes more cost risk if controls are weak. A well-run cost-plus project can be efficient, but a poorly documented one can drift, especially on complex jobs where overruns are common industry-wide.
Disclaimer
This article is for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Always consult a licensed attorney in your region before drafting, signing, or relying on a Cost Plus Construction Contract.
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A well-structured Cost Plus Construction Contract protects both sides by making costs transparent, approvals predictable, and documentation consistent from day one. It helps the owner control exposure without forcing unrealistic pricing, and it helps the contractor get paid faster with fewer invoice disputes.
Download the free Cost Plus Construction Contract Template or customize one with our AI Generator, then have a local attorney review before you sign.
