Time and materials or cost plus contracts are agreements in which a contractor gets paid for the direct costs incurred on a project, plus a markup for overhead and profit. Sometimes the markup is a percentage of actual costs; sometimes it’s a fixed fee based on the original estimate of the project.

These contracts (I’ll call them all cost-plus) ask the owner to bear the risk when things go bad – if costs go up, or the scope is revealed to be larger than expected – the contractor keeps working and the owner keeps paying. And cost-plus contracts increase the risk of most projects because they encourage contractors initially to underestimate the total project cost. For these reasons traditional cost-plus contracts are a bad idea for most homeowners, in my opinion. In my San Francisco-based contracting business, I don’t do cost-plus work for homeowners.

Recognizing these problems, California law requires every home improvement contract for more than $500 to include “the heading: “Contract Price,” followed by the amount of the contract in dollars and cents.”  This effectively means that in California, a cost-plus contract must have a guaranteed maximum or not-to-exceed price. The California Contractors State License Board outlines the position in this helpfully-titled information sheet: Time and Material Contracts Not Legal for Home Improvement. And there’s little room for fudging: contracts must also clearly describe the scope of work.

For most residential projects, most contractors would rather write a fixed-cost contract than a cost-plus contract with a guaranteed maximum price. If you’re a homeowner and you’re offered a contract with a guaranteed maximum price, you should understand that the maximum price is very likely the same as the price that the contractor would offer you on a fixed-price basis, and it is the price that you should plan to pay in the end.

Of course some contractors still do cost-plus work without providing a guaranteed maximum price. If you’re a California homeowner and you feel trapped in a cost-plus project with no end in sight, talk to your attorney about whether the contractor has provided a contract that’s even legal in California.

Cost-plus contracts work best with experienced and knowledgeable clients, working with efficient and trustworthy contractors.