Picture this: you’re finally ready to kick off a long-awaited kitchen remodel in your Portsmouth home. You've spent countless hours dreaming of the perfect design, selecting colors, and imagining how it will feel to cook in your newly renovated space.

But just when you think you’re ready to start the renovation, your contractor presents you with a cost-plus contract. Suddenly, you’re hit with a wave of anxiety! What does cost-plus even mean? Is it just a fancy term for time & materials, or is it something entirely different? Will this change your carefully planned budget?

Navigating the world of remodeling contracts can be intimidating, especially if you’re not familiar with the industry lingo. That’s why we’re here to break down the difference between time & materials (T&M) and cost-plus contracts, so you can make an informed decision. By the end of this article, you’ll have a clear understanding of how these contracts differ and when each one might be the right fit for your project.

And if you’re wondering, “Which contract type is best for my remodel?”—don’t worry, we’ve got you covered. We’ll get into that as well!

What exactly is a time & materials contract?

Let’s start with the basics. A time & materials (T&M) contract is pretty straightforward: you pay for the contractor’s time (labor) and the materials used on your project. It’s kind of like an open tab at a restaurant where you’re billed for exactly what you consume. The contractor sets an hourly rate, and you cover the cost of the hours worked plus the cost of materials—often with a small markup to cover procurement and handling.

Here’s an example: let’s say you’re renovating your bathroom in Exeter, NH. Under a T&M agreement, you’ll get an itemized invoice for hours worked by the team, along with the cost of materials like tiles, grout, or fixtures. This gives you detailed visibility into where every dollar is going.

Key features of a T&M contract:

• Labor: Billed hourly based on the time spent on your project.

• Materials: Billed at cost, plus a small markup.

• Transparency: You receive detailed invoices with line-by-line breakdowns.

When a T&M contract makes sense:

• For projects with many unknowns, like older homes where surprises are hidden behind walls.

• When you want flexibility to change the scope of work as you go.

• If you prefer full visibility into labor hours and material costs.

What is a cost-plus contract?

A cost-plus contract shares some similarities with T&M agreements but includes a critical difference: instead of being billed hourly for labor, you’re charged for the actual cost of labor and materials, plus an agreed-upon fee or a percentage markup.

Think of it like purchasing an artisanal piece at a craft fair. You’re paying for the raw materials and the craftsman’s expertise, but there’s a fixed markup to cover the seller’s effort of procuring and transporting the item to you. In the context of remodeling, this markup covers your contractor’s overhead, project management, and profit.

Here’s an example: during a kitchen remodel in Rye, your contractor might hire subcontractors (like electricians or plumbers) and bill you for their actual costs. On top of that, he charges you a markup, which could be a percentage or a fixed fee, to cover their management and coordination efforts.

Key features of a cost-plus contract:

• Labor and materials: Billed at actual cost.

• Markup or fee: A set percentage or fee added to cover overhead and profit.

• Detailed cost insight: Allows you to see the actual costs and the contractor’s markup.

When a cost-plus contract makes sense:

• For larger projects where flexibility is essential but you still want predictable cost control.

• If you have a clear idea of the quality of materials and labor you’re willing to invest in.

• When you want a bit more predictability than a pure T&M contract but still need flexibility.

Comparing the two: what’s the difference between time & materials and cost-plus contracts?

Now that we’ve outlined the basics, let’s dive into the key differences between time & materials (T&M) and cost-plus contracts. While these two contract types may seem similar at first glance, the distinction primarily lies in how labor costs are managed and how your final bill is structured.

Time & materials

Under a T&M contract, labor costs are billed at an hourly rate based on the hours worked, while materials are billed at cost, often with a small markup. This structure offers high transparency, as homeowners receive detailed breakdowns of both time and material expenses.

Additionally, T&M contracts are known for their flexibility, making it easy to adjust the project scope mid-way if necessary. However, this approach also carries a higher level of risk for homeowners, as costs can fluctuate significantly if the project takes longer than anticipated or if unexpected issues arise. T&M contracts are best suited for projects that are unpredictable or complex, where a fixed scope is difficult to define upfront.

Cost-plus

In contrast, a cost-plus contract involves billing labor at the actual cost, plus an agreed-upon markup. These labor costs may be billed hourly, but more often, they are fixed-cost bids from subcontractors. Materials are also billed at cost, but with either a fixed fee or a percentage markup to cover the contractor’s overhead and profit. This contract type maintains transparency but in a slightly different way—homeowners see a clear list of project costs, but without the time tracking or hourly rates.

While cost-plus contracts offer moderate flexibility, allowing for changes mid-project, they typically involve slightly less risk compared to T&M contracts because many of the labor costs are done on a fixed-cost basis. This means that, rather than paying for the hours a tile installer works, for example, you pay a fixed cost for your custom tile shower, plus the contractor’s markup or fee.

Cost-plus contracts are often better for larger projects where detailed tracking is needed, as they strike a balance between flexibility and cost predictability.

Are there any risks associated with these contracts?

Yes, both T&M and cost-plus contracts come with their own set of challenges. Here’s what to keep in mind:

1. Budget unpredictability: With T&M contracts, costs can quickly balloon if the project takes longer than expected. Even with cost-plus, you may face higher-than-expected bills if labor or material costs surge.

2. Micromanagement stress: Homeowners who choose T&M agreements often feel the need to monitor every hour worked to stay within budget, which can be exhausting. Cost-plus contracts are a bit more predictable, but you’ll still need to keep an eye on the costs as they accumulate.

3. Trust is key: Both contract types rely on a high level of trust between you and your contractor. Make sure you’re working with a reputable professional who provides clear, regular updates and communicates openly about costs.

How do I know which contract is better for my project?

Both T&M and cost-plus contracts offer transparency and flexibility that appeal to many homeowners. However, deciding which one is right for your project depends on factors like your budget, the complexity of the work, and how much control you want over potential costs.

Neither of these pricing structures offers completely predictable costs due to their variable nature. Under both of these structures, the final price can change based on unforeseen project challenges or increases in material costs. What these contracts do provide in exchange for this added financial risk is greater flexibility and enhanced transparency.

So, how do you choose?

• If you value knowing exactly where every hour and every dollar goes, a T&M contract might be your best option. This approach works well if you’re comfortable taking on the risk of additional costs if the project takes longer or if unexpected issues arise.

• On the other hand, a cost-plus contract can be a better fit if you need the flexibility of a variable-cost agreement but want a bit more predictability than T&M offers. The fixed-cost portions and the pre-agreed markup provide a cushion against the unknowns, giving you slightly more control over expenses.

Ultimately, the best choice comes down to your risk tolerance and how involved you want to be in managing the budget throughout the project. If your top priority is having a completely predictable cost from day one, neither T&M nor cost-plus may fully meet your needs. In that case, you might want to explore a fixed-cost contract, where the price is set upfront and remains consistent as long as the project scope doesn’t change. This type of contract is ideal if you want peace of mind with no surprises along the way. 

For a deeper dive into which contract type might be better suited for your kitchen or bathroom remodel in the New Hampshire seacoast, check out our comprehensive comparison here: Which is better: a time and materials, cost-plus, or fixed price contract?

Understanding payment schedules for T&M and cost-plus contracts

When using T&M or cost-plus contracts, the payment schedule can vary:

• T&M contracts: Payments are typically made on a regular basis (weekly, biweekly, or monthly), based on the hours worked and materials used during that period.

• Cost-plus contracts: Payments are often tied to project milestones, like completing the demolition phase or installing new cabinetry. This allows homeowners to align payments with significant progress, helping them better manage cash flow.

Frequently asked questions about T&M and cost-plus contracts

Now that we’ve covered the basics, let’s address some common questions homeowners have:

How can I protect myself from unexpected costs with a T&M contract?

One way to mitigate this risk is to set a "not-to-exceed" limit. This ensures your project doesn’t go over a specific budget without prior approval, giving you more control over expenses.

Are cost-plus contracts only used for projects with subcontractors?

Not necessarily. While they’re popular for managing subcontractor costs, cost-plus contracts can also be used for projects that involve a mix of in-house labor and outside specialists.

What is a reasonable cost-plus markup?

A reasonable cost-plus markup varies depending on how project management costs are handled. If project management is included as part of the project expenses before applying the markup, you’ll typically see a 20-30% markup to cover the contractor’s overhead and profit. However, if project management is included within the markup itself, the markup will be significantly higher, often in the 35-50% range. It’s essential to get clarification upfront on how these costs are structured so that you can fully understand your budget.

Can I negotiate the markup percentage in a cost-plus contract?

Markup percentages can sometimes be negotiable, especially for larger projects. However, contractors’ project management costs and overhead costs tend to be a lot more expensive than you might think, so your contractor is unlikely to have the ability to negotiate as much as you might think.

How can I avoid going over budget with these contract types?

Communication is your best tool. Make sure you’re getting regular updates from your contractor on hours worked and material costs. Ask for weekly or biweekly budget check-ins to catch any potential overages early.

How often should I expect cost updates from my contractor?

We recommend discussing this upfront. Weekly updates are common, especially for T&M and cost-plus contracts, to help you stay on top of expenses and avoid surprises.

Can I switch from a time & materials to a cost-plus contract mid-project?

While it’s possible to change from one pricing model to another mid-project, it can be challenging. Switching mid-stream could disrupt your project timeline, as it would require recalculating costs and possibly renegotiating agreements. It's best to choose your contract type before starting your remodel.

Which is right for you: time & materials or cost-plus?

Remodeling your home is a significant financial and emotional investment, and we understand that choosing the right contract can feel overwhelming. If you’re unsure about which contract type to choose, start with an open conversation with your contractor. Discuss your budget, concerns, and expectations to find the best fit for your needs.

Understanding the differences between time & materials and cost-plus contracts can make a world of difference in managing your next remodel. Whether you choose one of these flexible options or prefer the predictability of a fixed-price agreement, it’s crucial to work with a contractor you trust.

At Rothrock Kitchen & Bath Remodeling, we’re committed to making the remodeling process as stress-free as possible. We prioritize transparency, clear communication, and empowering you to make informed decisions. While we often recommend using fixed-cost contracts for the peace of mind they provide, we’re here to guide you through whichever contract type aligns best with your project goals.

Still feeling unsure? We’re here to help you navigate these choices. Schedule a consultation with us today, and let’s turn your remodeling dreams into reality!

Ready to get started on your remodel?

Don’t let contract confusion hold you back from your dream kitchen or bathroom remodel! At Rothrock Kitchen & Bath, we make the process stress-free and transparent. Schedule your consultation today, and let’s bring your vision to life—without the contract headaches. Give us a call or fill out our contact form today!