Cost Plus Contracts in UK Construction: Why the Lowest Tender Often Costs More

How construction tendering really works

A client sends the drawings to four or five contractors. The prices come back, and the lowest one wins. On a large job, the gap between first and second place can be small. So each contractor sharpens its pencil until it hurts.

That pressure does not make the building cheaper to build. The concrete, the steel and the labour cost what they cost. What changes is how much of that cost is in the tender, and how much arrives later.

Two kinds of cheapest

There are two ways to end up with the lowest price.

1. Accidental. The estimator missed something. A trade was left out, or a quantity was wrong. The contractor came in lowest by mistake, and now has to make the job work.
2. Deliberate. On larger projects, from around £1M to £2M and up, contractors usually know exactly where they did not price. They also know where they will make their money on the job.

Both end the same way for you. The number you signed is not the number you will pay.

Where the money comes back

This is where a cut tender is recovered after the contract is signed.

1. Variations. Every change is priced after you sign, when there is no competition.
2. Provisional sums. A rough allowance for undesigned work, adjusted to the real cost later.
3. Exclusions and qualifications. Items the tender quietly leaves out, listed in the small print.
4. Thin preliminaries. Site management, scaffolding and welfare priced too low, then claimed back as the job runs longer.
5. Delay and disruption claims. Extra time and cost argued against late information or changes.

Two sides of the same rope

Put the two sides of a building contract next to each other.

1. The client wants the lowest price, the best quality and the fastest finish.
2. The contractor wants to make as much money as it can, as fast as it can.

Neither side is wrong. But because the contractor tenders against others, it must cut the price first to win. Then it must make the money back later. So the two sides pull the rope in opposite directions for the whole job.

The margins explain why. The Construction Index Top 100 for 2026 found the average pre-tax margin of the biggest UK contractors rose to just over 3%. A quarter of them still made less than 2%. On a margin that thin, one missed item can wipe out the profit on a job.

The Insolvency Service figures show construction had more company insolvencies than any other industry. For you, a contractor that fails halfway through a job is the most expensive outcome of all.

The private sector construction playbook, published by the Construction Productivity Taskforce in 2022, asks clients to adopt fair and considered contract terms. It also asks them to agree how value for money is judged. Price alone is not a test of value.

What a cost plus contract is in UK construction

A cost plus contract pays the contractor what the work actually costs, plus an agreed fee. Labour, materials, plant and subcontracts are paid at cost, on an open book. The fee is the contractor's profit and head office overhead. The contractor has no reason to hide cost in the tender, because there is no fixed tender to win.

The JCT Prime Cost Building Contract 2024

JCT publishes a contract for this, the Prime Cost Building Contract. The current edition is PCC 2024. JCT says it is for projects that need an early start on site, where full documents can't be prepared before work starts.

In JCT's words, the contractor is paid for the prime cost of the works plus a contract fee. Interim payments are made monthly. The fee can be a fixed sum or a percentage of the prime cost.

NEC4 Option E: cost reimbursable

The NEC4 Engineering and Construction Contract has six main pricing options. Option E is cost reimbursable, often called cost plus. The client pays the actual cost of the works, defined in the contract, plus the contractor's fee. Costs the contract does not allow are excluded. Unlike Option C, there is no pain/gain mechanism.

Target cost: NEC4 Option C

Option C also pays cost plus a fee, but against a target price. At the end, the final cost is compared with the target. Any saving or overrun is shared in the agreed proportions. NEC says the pain/gain mechanism is meant to incentivise the contractor to meet or beat the target.

Here is the arithmetic, as an example. The target is £10M with a 50:50 share. The job finishes at £9M. The £1M saving is split, so each side gains £500,000.

Guaranteed maximum price (GMP)

A GMP puts a ceiling on cost plus. The contractor is paid its cost and fee up to the cap. Above the cap, it carries the overrun, unless you change the scope. Savings below the cap are often shared. You still need your own contingency for changes you make.

For early contractor involvement before the price is fixed, see our guide to a pre-construction services agreement.

Fixed price vs cost plus side by side

Our model: cost plus a small fee and a share of the profit

This is how we can structure a deal. It is an example, not a fixed offer, and not a guarantee. Every percentage is agreed deal by deal with the owner, founder or investor.

1. Construction at cost plus around 5%. We build on an open book. You see every invoice, timesheet and subcontract.
2. Plus a share of the development profit, for example 20%. We earn mainly when the development makes money, not on construction mark-up.

That puts us in the same boat as you. Pulling cost out of the build raises the profit, and part of that profit is ours. Finishing faster cuts your finance cost, which raises it too. Neither of us gains from a variation.

What "development profit" means here

Development profit is the gross development value (GDV) minus every cost of getting there:

• the land, including purchase costs;
• construction, including our cost and our fee;
• professional fees: design, engineers, planning and surveys;
• finance costs;
• sales and letting costs.

The share is negotiated. So is the order of payment: whether our share comes before or after any investor's priority return. Our guide to development appraisal, GDV and residual land value shows how the numbers are built.

A worked illustration on a £1.5M build

A scheme has a GDV of £4M. Land costs £1.2M. Professional fees are £200,000, finance £250,000 and sales £100,000. The real cost of the building works is £1.5M.

On the lump sum route, the winning contractor tenders at roughly cost to win. It then recovers £150,000 through variations and claims. On the cost plus route, we show two cases: no saving at all, and a saving in line with our own estimate of around 20%.

Read the middle column honestly. If cost plus brings no saving at all, you keep £60,000 less than on the lump sum route. In this example, you only come out ahead once the build saves about £71,000, just under 5% of the cost.

That is the bet both sides make. We only propose this model where we believe our team can build for less and faster. If we can't, a lump sum or a target cost may suit you better, and we will say so.

For the legal side, read our guide to property joint venture agreements.

How our construction department is built

The saving in the last column has to come from somewhere. For us, it comes from how our construction team is built.

1. In-house: the internal trades. Drylining, carpentry, painting and the other internal finishes are done by our own direct labour.
2. Subcontracted: mechanical and electrical services, structural works and steelwork.

On a typical job bought through layers, each subcontractor adds its own margin. Agency labour adds another margin on top. With our own people on the internal trades, there is one layer, and it is ours. That is where we estimate we can save around 20% of the construction cost for a developer or investor.

That figure is our own estimate from our projects. It is not an independent study, and it varies by job.

Why not do everything in-house? Direct labour moves the employment and utilisation risk onto us. We pay our people whether or not a job is ready for them. Specialist trades like M&E, structure and steel need certification, design responsibility and kit we would not keep busy all year. So we subcontract them to specialists and manage them ourselves.

One partner from planning to sale

A cost plus deal with a profit share works best when one team runs it from the start. Our team covers:

• getting planning;
• architecture and design;
• development management;
• structuring the deal for construction.

So we can run the scheme end to end as your partner, with the same interest as you. The aim is simple. Build the best product as fast as possible, sell it as fast as possible, and make a bigger profit at the end.

Depending on the stage, we can co-invest, take on all of the risk, or work on a fee or percentage basis.

Choosing who to bring in? Our guide on how to choose a development partner sets out the questions to ask. See also our property development services and turnkey construction.

When cost plus is a bad idea

Cost plus is not right for every job. Be honest with yourself before you choose it.

1. You need a fixed number for the bank on day one. A lender may want a lump sum. A GMP can bridge the gap, but not always.
2. You don't trust the contractor. Open book only works with a contractor you can audit and believe. If you can't, don't use it.
3. You have no one to check the costs. Without a quantity surveyor on your side, you are paying invoices you can't test.
4. The fee is a percentage with no target. Then the contractor earns more when the job costs more. That is the old rope in a new form.
5. The design is complete and simple. A well-tendered lump sum on a full design can be the sharper route.
6. Your brief keeps changing. Cost plus will absorb the changes, but you pay for every one of them.

For a fuller comparison of routes, read design and build vs traditional procurement and our guide to the JCT Design and Build Contract.

How to protect yourself on any cost-plus deal

Whoever you appoint, insist on these six things in the contract.

Our tips on choosing a commercial contractor cover the checks to make before you sign.

Most clients underestimate how much a tender's structure decides what they finally pay. We take on construction projects from £100,000, and development schemes as a partner. If you want a contractor pulling the rope the same way as you, book a site visit and we will look at your scheme.