Apr 2025 How a cost-plus estimate works, and how to sell it!
Over the past few years, I have been increasingly asked about the Cost-Plus Estimate, how it works and whether I think my clients should put it into practice.
The reason for the increased interest in the Cost-Plus method is that many business owners who have been using the Fixed-Price method have had the experience of actual labour hours exceeding what was quoted, resulting in little or no profit on more projects than they would like.
Let me explain how it works
Firstly, it is an Estimate and not a Fixed Quote.
When a quote is being created in your software or quoting sheet, man hours are added to each area while carefully considering your crew’s experience, skill set, site measurements, accessibility and the complexity of the design. Also, for each element of the scope of works, all materials and larger equipment (e.g. excavators, skip bins, etc.) will be entered using the base prices in your system.
The labour hourly rate is an elevated rate that covers the loss of larger markup on plants and hardscape materials you would normally charge in a Fixed-Price Quote. The markup you can add to materials, equipment and subcontractors is 20%. Is that enough? – Yes, if your labour rate is high enough. The elevated hourly rate keeps Gross Profit high enough to cover overhead recovery and leave 10-15% Net Profit.
Selling the Cost-Plus Estimate
The Cost-Plus approach can be explained as a fairer system. Its fairer than a Fixed-Priced Quote because a Cost-Plus Estimate doesn’t feature the additional labour hours that are included in each element of the scope of works of a Fixed-Price Quote. Typically, extra labour hours are a safeguard in case some elements take longer than expected for many reasons – weather, complexity of design, limited experience or a slower working pace amongst your crew, etc.
You can explain that the Cost-Plus method is a fairer system because you will only bill the client when the crew works on site and for the exact materials and equipment used. So this method can save the client money. The client receives an invoice each Friday for labour hours and materials used during the week, expecting payment over the weekend. You can also offer the client transparency by sending copies of the large invoices, but it’s not essential. With this system you must ensure that your team is productive and not wasting time (as the client is paying for each hour the team are on site).
Why is the Cost-Plus method being utilised by more business owners?
It is a safer method to use for many builds to ensure profit and cease the regular occurrence of labour hours ‘blowing out’ or being underestimated.
This method does require systemised and regular communication with the client, both verbally and by email. It is essential that invoicing occurs exactly as you have stated, and transparency is upheld (if that is what you have promised the client).
If you are thinking: “I can’t use this method, my potential clients want a Fixed-Price Quote”
I hear this often and tell my clients the story of a past client of mine that has used the Cost-Plus method since he started his business 15 years ago. His average construction project was between $60,000 and $80,000 and his net profit % was as expected on most projects.
In summary, if the Fixed-Price method is working well for you and your clients, there is no need to change. But if you have been thinking about the Cost-Plus method and want to try it, test it out on a smaller project proposal and get used to the process.