What a cost plus contract is, and how the builder's fee is set

What the homeowner pays under cost plus

A cost plus contract has two parts to its price. The first is the cost of the work: what the builder actually pays trades, suppliers and site workers to build the project. The second is the builder's fee, which pays for the builder's management, overhead and profit. The Canadian Construction Documents Committee (CCDC), the national committee that writes Canada's standard construction contracts, publishes a cost plus form called CCDC 3 2016. Its own description is a standard prime contract between owner and prime contractor to do the work "on an actual-cost basis, plus a percentage or fixed fee which is applied to actual costs."

If you are still deciding which contract type to use, read fixed price or cost plus first. In short, a fixed price contract puts the gap between estimate and real cost on the builder, who prices that risk into one number. A cost plus contract puts the gap on the homeowner and shows the real costs in return. This chapter starts after that choice, with the terms that decide whether a cost plus contract works for the person paying.

On a Vancouver renovation or a new duplex in Burnaby, the same four questions come up. How is the fee set? What counts as cost? Is there a cap on the total? And what records does the homeowner get to see? A contract that answers all four in writing lets both sides settle a disagreement by reading a clause. A contract that leaves them open sends the question to a negotiation in the middle of the build, when the homeowner has fewer choices.

Percentage fee or fixed fee

A percentage fee is a set percentage added to every dollar of cost. If the cost of the work goes up, the fee goes up with it in the same proportion. The method is simple to apply and suits a project whose scope is unclear at signing, because the fee follows the work wherever it goes. The weakness is the incentive: the builder earns more when the project costs more. The contract then has no built-in reason to hold cost down, so regular cost reporting has to do that job.

A fixed fee is one amount, agreed at signing, for the builder's management and profit on a defined scope. The fee stays the same when the cost of that scope rises or falls. This removes the incentive problem and moves the argument to a new place: what counts as a change in scope. If the homeowner adds a room, the fee should rise. If a trade price goes up, it should stay where it is. The contract needs a clause that says which events adjust the fee and by how much, for example a stated percentage applied to the cost of approved changes only.

Some contracts mix the two, with a fixed fee for the base scope and a percentage fee on change orders. Others step the percentage down as cost passes set levels. Any of these can work. What matters is that the method is written down, the fee shows as its own line on every payment request, and the homeowner can check the arithmetic against the invoices behind it.

A cap on the total: guaranteed maximum price

A guaranteed maximum price, often shortened to GMP, is a cap on what the owner pays for a defined scope under a cost plus contract. Costs up to the cap are paid as cost plus fee. In the usual meaning of the term, costs above the cap are the builder's to carry, except where the owner changes the scope; the contract's own definition is what applies. The CCDC construction management form for services and construction, CCDC 5B 2025, lists a GMP option. Its description also names a "GMP Plus Percentage Cost Savings" option, where savings under the cap are shared, and the choice to convert the contract into a stipulated price contract, which is a fixed price.

A cap needs the same thing a fixed price needs: drawings complete enough to price. A builder asked for a GMP on a house that has not been opened up will set the cap high, to cover what might be behind the walls. On new construction with a full drawing set, a GMP can give a homeowner much of the certainty of a fixed price while the invoices stay visible.

Read three things in any GMP clause. First, the exact scope the cap covers, listed by drawing and specification number. Second, the list of events that raise the cap, such as owner changes, concealed conditions or permit requirements added after signing. Third, how shared savings are split and when they are paid. A cap that rises for every unexpected condition gives the homeowner little protection.

What counts as cost of the work

The fee gets the attention, but the definition of cost of the work sets how much of the money is billable. Read that definition in the contract line by line. Each item in the table below is a place where two people can read the same words in different ways. Write the answer into the contract before signing.

Two items need the closest reading. The first is the builder's own crew. If the builder's carpenters are billed at an hourly rate, that rate already includes some profit, and the fee is then added on top. Agree the rates in a schedule attached to the contract. The second is rework. When a trade has to redo faulty work, the contract should say whether the owner pays for the redo as cost, or whether the trade or the builder carries it.

Open books: the records an owner can see

Open book means the owner sees the builder's real costs: every invoice, timesheet and credit that makes up the cost of the work. In a cost plus contract this is the basis of trust, so write it down. A useful clause lists the documents attached to each payment request, gives the owner the right to inspect the builder's project records on notice, and requires those records to be kept for a set time after completion.

British Columbia law adds a right that exists whatever the contract says. Under section 41 (2) of the Builders Lien Act, an owner may ask the contractor in writing, at any time, for the terms of any subcontract, including the parties, the subcontract price and the state of accounts between them. Section 41 (3) gives the contractor 10 days to comply. If the contractor does not answer, section 41 (5) lets the owner withhold further payments until it does. A person who misstates the information, knowingly or through negligence, is liable for the resulting loss under section 41 (4). Section 42 (2) makes void any agreement that the Act will not apply, so a contract cannot remove these rights.

Two more sections matter on a cost plus job. Section 10 says money a contractor receives on account of the contract price is a trust fund for the people engaged on the project, and the contractor must not divert it until they are paid. And section 4 requires the owner to hold back 10% of the greater of the value of the work provided and the payments made on account of the price. Each cost plus progress payment is a payment on account of the price, so the holdback applies to it. The payments and holdbacks chapter covers how it is kept and released.

One last point. A cost plus contract with no budget has nothing to measure against. Ask for a written estimate at signing, broken down by trade, and a monthly report that shows cost to date, cost still to come, and the forecast total against that estimate. The estimate gives both sides a number to compare each month's costs with.