A cost-plus contract pays the contractor for the actual cost of labor, materials, and subcontractors, plus a fee that compensates the contractor for overhead and profit. The fee can be a fixed dollar amount, a percentage of cost, or a guaranteed maximum price (GMP) variant where the contractor caps total cost.
Cost-plus is common on projects with high uncertainty (custom homes, complex renovations, unknown-condition work) where fixed-price would force the contractor to load excessive contingency. The trade-off is that the owner carries overrun risk and must trust the contractor to manage costs honestly. Detailed cost documentation, open-book accounting, and frequent reporting are standard practices to maintain owner trust on cost-plus work.