Here’s a handy guide on cost plus billing for contractors. When invoices and billings are concerned, there are different methods contractors can use to tackle them and calculate the costs incurred plus the profit they will be making on a project. But the sheer amount of invoices contractors get involved with these days makes this process very hard. If you’re an independent contractor involved in multiple projects, keeping track becomes even more difficult. 

Multiple AP tools available can help you in the process but to a certain degree. It normally takes 30 minutes to an hour to get through one invoice and finally calculate the total cost your customer will have to pay if you’re using one of these tools. 

We’ll be discussing the concept of cost-plus, different cost-plus techniques such as cost-plus invoice and contract, software that help contractors streamline operations involved in sorting and generating invoices, and other terms related to cost-plus billing. 

What Is the Concept of Cost-Plus Billing?

Cost-plus billing is used in accounting, especially by construction contractors in project management, to calculate the amount they’ll charge their customers or the selling price in a billing period. This is done by calculating the direct and indirect production costs and then adding a markup to the billing rates. 

Cost-plus projects are mostly construction projects due to the features of cost-plus billing. Cost-plus projects can be elastic or have a fixed markup with flat rates depending on the contractor’s approach. This approach provides you with different payment terms and payment methods you can choose from. 

Bill or Invoice Markup 

A markup represents the profit desired by the contractor. This is usually a profit percentage of the total cost incurred by the contractor. For instance, a contractor spent $1 million to produce a product. They might charge the customer a percentage of 15% or $150,000. 

The exact markup rate might be fixed and predetermined by the contractor and customer or subject to variation. 

What Does Cost-Plus 20% Mean?

Suppose a contractor charges a 20% markup on $1 million spent to produce a product/service. This means the customer must pay 20% of the 1 million or, in other words, $200,000 in addition to the 1 million. 

So, the billable or lump sum amount the customer will have to pay will be $200,000 + $ 1 million or $1.2 million.  

Direct and Indirect Costs

Now that we understand the markup, let’s talk about the other part of the cost-plus, which is the total cost. 

Total cost is a sum of direct and indirect costs and is different from actual costs. Direct costs are related directly to the production of the product and influence the final cost. 

In contrast, indirect costs are costs incurred while running a company, such as rent, security expenses, utilities, and material and labor costs. 

Direct costs make up the bulk of the expenses when billing a customer. When billing, you’ll mostly be dealing with direct costs, and entering them can be a hassle in addition to entering indirect costs, SKUs, and customer conditions. 

You can use software such as MakersHub, an AP automation service that automates the entry of direct and indirect costs from invoices to QuickBooks invoice template with seamless integration and a user-friendly interface, so you don’t have to spend a vast number of hours entering invoices. It helps make the invoicing process a breeze by eliminating manual entries like on Excel, QuickBooks, or any other data and accounting software. 

Overview of Cost-Plus Billing

Cost-plus invoicing is a pricing method to calculate the bill amount or the lump sum. It’s used by general contractors in project management, procurement, construction projects, and construction businesses. 

It’s one way to implement the cost-plus concept when creating invoices and deciding the amount of makeup you, as a contractor, will charge. It provides you with a job costing report before a project is carried out. 

A cost-plus invoice is an invoice that includes the cost of materials, labor costs, and overhead expenses incurred during a project. The cost is then marked up by a predetermined percentage which the contractor or general contractor and the customer decide on. 

So, in this case, the total job cost or the final cost the customer will be paying is the costs the contractor incurs plus the markup. 

• Billable / Lump sum = Costs incurred/ Billable expenses + Markup 

This payment method allows for greater transparency and provides the client with a clear understanding of the costs incurred during the project. It also provides clients with a fixed fee contract, which means they are presented with the exact amount due which they can look forward to paying. 

How Do You Write a Cost-Plus Invoice?

A cost-plus invoice consists of the total costs, both direct cost and indirect costs. After calculating this cost, we move on to applying a predetermined markup. 

This markup is a percentage of the total cost and the profit a contractor charges for offering their services. This subtotal is the final cost or the fee amount and is billable to the customer. Customers can then decide their payment options, such as credit card, bank account transfer, or cash payments.  

How Do You Calculate the Price of an Item Under a Cost-Plus Contract?

The price of an item or the total cost can be calculated by adding the costs incurred while producing the item. This cost is the sum of the direct and indirect costs. 

• Item price/Total cost = Direct costs + Indirect Costs 

Overview of Cost-plus Contract

The cost-plus contract method is a second method to implement the cost-plus concept. In this method, the contractor is reimbursed for the cost they incurred plus a percentage of the total cost of their services by the customer. It is a flexible approach more suited for projects where the scope of work is unclear, or the costs incurred by the contract may change. 

This reimbursement of funds is subject to variability as in cost-plus contracts, and contractors do not have to worry about costs as there are no predetermined fixed costs. 

What Are the Disadvantages of a Cost-Plus Contract?

A downside this method presents for the customers is that they may have to bear more subtotal expenses in case the contractor’s costs increase during the project duration, as this method accounts for price variability. The contractor will also have less incentive to be efficient as they’ll be profiting regardless. 

What Is the Difference Between a Cost-Plus Contract and a Fixed-Price Contract?

These two options have different payment terms. The billable to the customer is not a predetermined figure in a cost-plus contract. All of the parties know what the billable will amount to once the project is completed. A rough estimate of the subtotal and receivables can be done, but the exact amount is only determined by the end of the cost-plus project. 

Fixed price contracts, on the other hand, have predetermined flat rates, and the contractor has an obligation to complete the project within these flat rates to fulfill the fixed fee contract. Since the total cost is predetermined, the markup percentage can be used to calculate the markup price, which can then be used to determine the final cost billable to the customer. 

• Final cost/ Amount due = Total Costs + Markup 

QuickBooks by Intuit and Cost-plus Billing

QuickBooks is an accounting software solution by Intuit Inc. It is used by small businesses and medium businesses all over the globe. This invoicing software helps streamline the process of invoicing and bookkeeping, in addition to other features. Some of these features include: 

• Expenses.
• Organizing receipts and creating invoices (vendor invoices) 
• Reports (Cash flow reports).
• Year-end insights and much more. 
• Ease of use features like billable expenses, multi-currencies, automated statements and late payments. 

QuickBooks accounting software by Intuit provides users with an invoice template, allows them to do cost-plus billing, and considers all the direct and indirect costs plus the markup. It replaces the manual formula input on apps like Microsoft Excel. It makes the invoicing process easier for users by calculating the payment information and the total amount they have to charge a customer and does all the necessary calculations required to come up with this cost. 

However, you have to manually enter all types of costs and select their designation, which is time-consuming and can take upwards of 1 hour to fill out an invoice. In addition, companies often deal with multiple independent contractors and subcontractors, which can bring complexities like late payments, invoicing problems and increased workload.  

Integrates with QuickBooks: Introducing MakersHub 

MakersHub provides a solution as it can be integrated with a 2-way sync with the QuickBooks invoicing app. Its invoice data capture technology can read free contractor invoice templates for you and make your professional invoices by extracting the necessary information of your choosing when using billing software and bookkeeping software like QuickBooks and Freshbooks. 

You can choose out of 39 fields that cover all the information like invoice numbers, due dates, phone numbers, contact information, invoice date, discounts, vendor details, payment terms, and much more. All these can be extracted and put into a singular invoice template present on QuickBooks invoicing software. 

MakersHub also allows keeping track of invoices so that dealing with subcontractors is easy and the system as a whole stays cohesive using professional invoices. Any unnecessary and unkept paperwork is out of the window, so you don’t have to deal with searching records when you’re busy with the billing process and significantly reduce the number of hours to fill a professional invoice and avoid late fees. 

Getting QuickBooks

QuickBooks is an optimum solution to all of the accounting needs of small businesses. It also negates the need of paper which is otherwise used in large quantities when printing invoices. It instead sorts your accounting records digitally and securely. If you want to make your invoicing process and bookkeeping hassle-free and keep track of your cash flows, QuickBooks invoicing software is a no-brainer. QuickBooks is also integrated with PayPal for streamlined financing. 

QuickBooks accounting software by Intuit is available from $42.5 per month for their QuickBooks online plus product. This product can be used on any device and is offered in their QuickBooks online plus plan. Other plans include QuickBooks online advance for $100 per month and QuickBooks Desktop enterprise which can cater to up to 40 users. 

The Best Solution 

MakersHub can be used instead of invoicing software like Buildxact to automatically pick up necessary invoice elements from inconsistent free contractor invoice templates and display them in a cohesive invoice template which can be used to present billables and further edited to satisfaction. It also helps track independent contractors’ and subcontractors’ bills using its bill approval tracking feature, making the billing process much easier for construction businesses. 

The Bottom Line

Invoicing and cost-plus billing have become easier than ever with the help of accounting software and invoicing apps in today’s day and age. And with constant integration with the business plus automation features, generating bills and invoices requires only a couple of clicks.

Accounting apps like MakersHub allow you to create a cohesive accounting system with the help of their automation and OCR technology, specifically designed to pick important aspects like PO number, invoice number, company name, phone numbers, due date, invoice date, invoice number and vendor details out of an invoice template. It has the ability to pick elements out of invoice templates from different independent contractors for quick online invoicing. 

These self-learning and automated systems are extremely beneficial to cut costs and significantly reduce the time for processes such as invoice processing that otherwise cost a lot of money and take up a lot of time. Industry leaders use them and are the perfect and much more efficient alternative to towers of paperwork.