What is the risk associated with cost-plus contracts?

Cost-plus contracts create a situation where the owner is responsible for covering the actual costs incurred by the contractor, plus an additional fee, which can be a percentage of costs or a fixed amount. This arrangement means that as costs increase—whether due to unforeseen complications, increases in the price of materials, or extended timelines—the financial burden falls primarily on the owner.

Because the contractor is reimbursed for all expenses plus the fee, there is little incentive for them to keep costs down, which can lead to escalating project costs. In this context, the owner is exposed to the risk of these increasing costs without a clear limit, leading to potentially unlimited financial exposure. This creates a significant risk for owners, as their overall project budget may be subject to substantial increases based on the contractor’s spending.