Cost-Plus Construction Contracts in the UK

A construction cost-plus contract – sometimes called a cost-reimbursable or prime cost contract – reimburses all project costs and adds a fee to cover the contractor's overhead and profit. UK clients often employ this contract when they want to mobilise a scheme quickly or when an unclear scope of work makes estimating the total cost challenging. However, the final price may ultimately exceed that of other contract types.

This guide examines how cost-plus contracts work, provides a UK-focused example, weighs the pros and cons, and explains how to introduce a Guaranteed Maximum Price (GMP) clause to control spending.

How Cost-Plus Contracts Work

A cost-plus contract is a construction agreement that reimburses project costs and adds a markup covering the contractor's overhead and profit. The name itself is a shorthand reminder of what the contract covers: project costs plus contractor markup. In the UK, the most common standard forms are the JCT Prime Cost Contract and NEC4 Option E.

This contract type most commonly operates between a client and a main contractor, though main contractors sometimes mirror it with subcontractors.

The contract signed by the client and main contractor specifies exactly what counts as a project cost. Also called direct costs, these typically include everything directly associated with construction activities – the bulk coming from labour, materials and subcontractor markup.

The agreement also spells out how the contractor calculates the fee. Common approaches include:

• Percentage of cost: A markup equal to an agreed percentage of total project cost (usually 5–20% in the UK)
• Fixed fee: A flat amount determined during contract formation
• Incentive fee: An additional sum if the contractor meets targets such as cost savings or faster completion
• Award fee: A discretionary bonus for exceeding performance expectations

Contractors often find cost-plus contracts easier to negotiate because they reduce risk. Unlike lump-sum contracts – where profits shrink if actual costs exceed the estimate – a cost-plus form guarantees reimbursement plus fee.

That said, a cost-plus contract does not provide a blank cheque. The contractor must provide the client with a good-faith estimate for the total project cost and a bill of quantites against which the team measures progress. Detailed evidence of spend and RICS-compliant valuations must support payment applications.

Contractors have good reason to provide realistic estimates. Coming in on – or under – budget builds trust and increases the chance of repeat work. Conversely, unrealistic estimates can lead to denied variation orders, cutting into the contractor's fee.

Cost-plus contracts do not cover costs arising from the contractor's negligence or defective work, although genuine estimating errors may still qualify for reimbursement.

When to Use Cost-Plus Contracts

Cost-plus agreements suit projects where speed, flexibility and transparency outweigh the need for a fixed price. Typical UK scenarios include:

• Post-flood emergency repairs to a Victorian school, where scope changes daily
• Specialist restoration of Grade II-listed façades where quantities remain uncertain
• Early-stage fit-out of a data centre before the client locks down full requirements

On schemes ranging from £5 million refurbishments to £25 million new builds, clients opt for the cost-plus route to commence works while design develops, confident that the contract will reimburse verified costs.

Advantages for Both Parties

Generally speaking, clients concerned about timeline and rapid mobilisation benefit from cost-plus contracts, while main contractors appreciate the reduced commercial risk.

Potential Drawbacks

Nevertheless, cost-plus contracts present some disadvantages for the parties involved – though careful contract formation and relationship building can usually mitigate these.

A basic cost-plus contract leaves the client unsure of the final out-turn cost, which could lead to budget overruns. The model works best where a trusting relationship already exists.

Contractors, meanwhile, must provide robust documentation to secure reimbursement. Many firms now adopt digital cost-management tools to meet this requirement.

One effective risk mitigation strategy involves including a Guaranteed Maximum Price (GMP) – also called a ‘cost-cap’ or ‘not-to-exceed clause’ – which limits the client's liability while incentivising the contractor to control costs.

The UK Housing Grants, Construction and Regeneration Act 1996 gives both parties rapid adjudication if payment issues arise, reducing the risk of long-running disputes.

Real-World Application

A property development company engages a main contractor (MC) to convert a decommissioned aircraft hangar near Manchester into an upscale retail space. Trust between the parties makes a cost-plus arrangement viable.

The contract – based on the JCT Prime Cost Contract 2016 – requires reimbursement of all project costs plus a 10% fee. The MC provides a realistic good-faith estimate and a schedule of values before work starts.

As the project progresses, specialist subcontractors submit interim applications for payment to the , who in turn issues RICS-compliant valuations to the client. If 200 m² of additional cladding becomes necessary at £45/m², the MC logs the extra £9,000 as a variation order and claims accordingly.

Should scope changes become significant, the parties may amend the contract via a formal variation order; the Construction Act 1996 allows them to refer unresolved issues to adjudication.

Upon practical completion, the client pays the remaining costs and fee within 30 days of the Certificate of Practical Completion. The MC then settles any subcontractor retention.

By using a cost-plus form with a transparent audit trail, the MC secures a healthy margin while the client meets programme targets despite an evolving scope.

Alternative Contract Types

Cost-plus contracts serve a valuable purpose, but they are not the only option. Depending on the project and the client's appetite for risk, other forms may prove preferable:

• Lump-sum contracts fix the price at the outset, giving clients greater cost certainty
• Guaranteed Maximum Price (GMP) contracts set an upper limit on spend; the contractor or Construction Manager at Risk absorbs any overrun
• Time & Materials contracts reimburse labour and materials at agreed rates, similar to cost-plus but without a separate fee
• Unit-price contracts pay for repeatable units of work; these prove useful on housing developments with standard house types

Choosing the right contract helps balance financial exposure against potential upside.

Adding a GMP Clause

A GMP clause – often added to a cost-plus contract – sets a ceiling beyond which the contractor must absorb costs. The parties typically share savings below the cap, e.g. 80% to the client, 20% to the contractor. Including a GMP provides reassurance to lenders and aligns incentives without losing the flexibility of the cost-plus model.

Getting Contract Formation Right

Contract formation offers the critical opportunity to mitigate risk. Careful review of reimbursable items, variation-order procedures, dispute resolution, payment applications and insurance requirements helps keep conflicts to a minimum.

Payment timelines follow the Construction Act 1996, and duty-holder roles set out in CDM 2015 remain unchanged. Clients may still require a 10% performance bond and professional indemnity insurance.

Both clients and contractors should remember that a well-defined contract forms a cornerstone of profitable delivery.

FAQs

What is a cost-plus building contract UK?

A cost-plus building contract reimburses verified costs plus an agreed fee, often under the JCT Prime Cost Contract 2016 or NEC4 Option E.

How do I cap costs on a cost-plus job?

Add a Guaranteed Maximum Price (GMP) clause that limits the client's liability and shares any savings.

Is VAT recoverable on reimbursed costs?

Yes, but normal VAT rules apply – see HMRC VAT Notice 708.

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