Which type of construction contract involves paying the contractor based on actual costs plus a fee?

A cost-plus contract is a type of construction agreement where the contractor is reimbursed for the actual costs incurred during the project, which can include materials, labor, and overhead, along with an additional fee that serves as their profit. This arrangement allows for flexibility in project costs, as it accommodates changes in scope or unforeseen expenses, making it suitable for projects where the exact costs cannot be determined upfront.

In a cost-plus contract, the contractor is incentivized to manage costs effectively, as their fee is often a percentage of the total cost. This setup can lead to a more collaborative relationship between the contractor and the owner, with both parties focused on the project's overall success rather than strictly adhering to an initial budget.

The other contract types differ primarily in their structure and the way financial responsibility is delineated. A fixed-price contract establishes a set amount for the project, irrespective of the actual costs incurred, which can pose risks for contractors if expenses exceed the estimate. A time and materials contract combines elements of labor and materials billing without a fixed total cost, but does not have the same fee structure as the cost-plus method. Lastly, a unit price contract sets costs per unit of work, which can be beneficial for projects with clearly defined quantities, but again, does