A cost plus contract pays you for the costs you actually incur on the work, plus a fee on top. It fits when scope is uncertain, such as ground conditions you cannot see yet or a heading that may change. It fits you only if you can prove every cost line.
The contract does not pay what you spent. It pays what you spent and can document as allowable. The gap between those two numbers is where contractors lose cash, and the cause is records, not pricing.
A missing timesheet shows up on a real invoice as a real cut. The example below puts a number on it.
Worked example
These numbers are illustrative, so swap in your own. Say you run a cost-plus-fixed-fee drilling contract for one month. The fee was fixed at signing at 12,600 USD. You billed 1,240 labor hours at a burdened 48 USD per hour, 310 machine hours at 135 USD per hour, 18,400 USD of bits and steel, and 6,230 USD of rental and subcontract invoices. At review, the client finds 38 labor hours with no signed daily report and one 2,150 USD rental invoice with no matching purchase order.
| Step | Calculation | Result |
|---|---|---|
| Labor cost billed | 1,240 h x 48 USD/h | 59,520 USD |
| Equipment cost billed | 310 h x 135 USD/h | 41,850 USD |
| Total reimbursable cost as billed | 59,520 + 41,850 + 18,400 + 6,230 | 126,000 USD |
| Invoice as submitted | 126,000 + 12,600 fixed fee | 138,600 USD |
| Labor disallowed for no signed daily | 38 h x 48 USD/h | 1,824 USD |
| Total disallowed | 1,824 + 2,150 | 3,974 USD |
| Amount actually payable | 138,600 - 3,974 | 134,626 USD |
Answer: Two missing records held back 3,974 USD of a 138,600 USD invoice. The fixed fee did not change, so the full 3,974 USD came out of costs you already paid.
What the client's reviewer opens first
The reviewer does not start with your invoice total. They start with the cost lines and ask one thing of each: where is the proof?
For labor, that means a daily report or timesheet naming the person, the hours, the heading and the work. For equipment, machine hours must match the daily. For consumables, you need a receipt or issue record. For rentals and subcontractors, a purchase order and a vendor invoice that agree.
If a line has no proof, the reviewer cuts it. They are not being difficult. The contract says they pay allowable, documented cost, and an undocumented cost is not documented.
What "allowable" means in practice
Most cost plus contracts define which costs count. A cost usually has to be reasonable, necessary for the work, and charged to the right contract. Some items are commonly excluded or capped, such as fines, certain travel, or overhead the contract already covers through the fee.
Federal work follows the cost principles in 48 CFR Part 31 on eCFR. The rules for cost-reimbursement contracts sit in 48 CFR Subpart 16.3. Private mine contracts follow whatever cost definition is written into the agreement. Read that clause before the first shift, not at the first dispute.
Settle three questions in writing before work starts:
- Is burden on labor reimbursed as a rate, or as actual cost?
- Do owned machines bill at an agreed hourly rate, and does that rate include operator, fuel and repairs?
- Is standby billable, and at what rate?
If the contract is silent, ask. A rate you assumed and the client never agreed to is the first thing to be disallowed.
The daily report is the anchor
Every cost line should trace back to a daily report. The daily says who worked, which machine ran, how many meters or rings were done, what was consumed and what delayed the shift. Once signed, it supports labor, equipment and consumables at once.
That is why a lost or unsigned daily costs more than the paper. In the example above, 38 hours without a signed daily cost 1,824 USD. The work happened. The proof did not.
Keep three habits:
1. Sign dailies the same shift, or the next morning at the latest. A signature collected three weeks later invites questions. 2. Record delays with a cause and a time range. "Standby 2.5 h, waiting on ground support" holds up. "Delays" does not. 3. Record changes in scope the day they happen, with the client's name and what they asked for.
If your dailies live in WhatsApp photos and a spreadsheet, the proof exists but takes hours to assemble. A weekly job cost report built from the daily reports shows the gaps while there is still time to fix them.
Labor, equipment and consumables, one at a time
Labor. Match payroll hours to daily-report hours every week. Mismatches are common: a driller on payroll for 12 hours and on the daily for 10.5. Resolve each one before it reaches an invoice. Keep your burden calculations on file, because the reviewer may ask how you built the 48 USD figure.
Equipment. Take billable machine hours from the daily, not from memory at month end. Separate working hours, standby hours and down hours, because they often bill at different rates or not at all. Keep the maintenance log for any machine charged at an actual-cost rate.
Consumables. Bits, steel, grout and rod are easy to over- or under-charge. Track issues per hole or per shift where you can. If you bill actual cost, keep the supplier invoice. If you bill a unit rate, keep the agreed rate sheet.
Rentals and subcontractors. Match every invoice to a purchase order and to the dates it worked on this contract. A rental that sat idle on another job for half the month cannot be fully charged here.
Fee structures and what they do to your incentives
The fee pays you for running the work and carrying risk. Its shape changes how you behave.
- Fixed fee. The amount is set at signing and does not move with cost. You earn it by finishing the scope. Cost savings help the client, not you, and disallowed costs hurt only you.
- Percentage of cost. The fee grows with cost, which rewards spending. Clients dislike it, and federal prime contracts generally prohibit it.
- Incentive or award fee. Part of the fee depends on cost targets, schedule or performance measures. It needs the best records, because the client will measure you against them.
For a fixed fee, a quick check is fee divided by total cost. In the example, 12,600 / 126,000 gives 10%. If costs run 20% over the estimate and the fee does not move, your effective fee percentage falls even while you bill more. Watch that number as the job runs.
Where a cost plus contract loses money quietly
The loss rarely arrives as one big dispute. It arrives as small cuts and slow payment.
Disallowed lines. Each one is small. Across a year, the total gets large.
Payment delay. If the reviewer holds an invoice for questions, you fund the labor, fuel and consumables meanwhile. Clean packages get paid sooner.
Unbilled work. Costs that never reach an invoice are lost too. A shift of standby you forgot to record, or a machine move nobody logged, is real cost you can no longer claim.
Late changes. Scope changes agreed on site by phone, with no written record, are the hardest to collect.
The model itself is fine. It punishes loose paperwork and rewards an office that keeps tight records. The annual cost of re-keying and chasing paperwork is worth sizing, and the manual reporting chain is a good place to start.
A weekly routine that protects the invoice
Do this every week, not at month end:
1. Pull the week's dailies and confirm each one is signed. 2. Match labor hours to payroll. List every mismatch. 3. Match machine hours to the daily and to any telematics or hour-meter log. 4. Match consumables issued to consumables charged. 5. Match each vendor invoice to a purchase order and a date range on this contract. 6. List open items and assign each one to a person with a date.
By month end, the invoice is mostly assembled. Only the small stuff is left.
Job costing is the other half
Reimbursement tells you what the client will pay. Job costing tells you whether the contract is worth having. Even when costs pass through, you still carry overhead, idle equipment and unbilled time. A structure such as revenue minus five cost lines shows what the contract earns after everything is counted.
The job cost and margin calculator lets you enter your own revenue and cost lines and see margin per contract. Run it on last month's actuals before you price the next cost plus bid. If the margin after disallowed costs and slow payment looks thin, the fee is too small or the records are too loose.
Before you sign
Read the cost definition, the payment terms and the audit clause. Ask how long the client has to review an invoice and what happens to disputed lines. Ask how long after final payment the client can audit, because you must keep records that long.
Then check your own system. Could you rebuild last month's invoice line by line, with a signed daily behind each hour and each machine? If not, fix that first. The contract pays for what you can prove.
Run your own numbers
Rather than work it by hand every time, the job cost and margin calculator does this arithmetic and shows its working. The rest of the set is on the mining calculators page.
Common questions
What is a cost plus fee agreement?
A cost plus fee agreement reimburses the contractor for the allowable costs of the work, then adds a fee as the contractor's payment for managing it and carrying risk. The fee can be a fixed amount, a percentage of cost, or tied to performance. The client pays for documented costs, so records decide how much you collect.
Can you provide an example of a cost-plus-fixed-fee contract?
A cost-plus-fixed-fee example: you and the client agree a 12,600 USD fee up front. In a month you document 126,000 USD of labor, machine time, consumables and rentals. The client pays 126,000 + 12,600 = 138,600 USD. If costs rise, the fee stays at 12,600 USD. If some costs are disallowed, you absorb them.
What are the downsides of using cost-plus pricing?
The main downsides are cash and control. The client can disallow any cost you cannot document, and you carry that loss. Slow review delays payment. Clients may also push for tight approvals on spending. A percentage fee rewards higher cost, which clients distrust, and federal work generally prohibits that structure. Weak records turn the contract into a margin leak.
Getting this off paper
Most contractors already know these numbers. The cost is in re-keying them into a report, then a timesheet, then an invoice. If that is where your week goes, book a 20-minute call and we will look at your actual paperwork.
