Cost-plus vs day-rate vs fixed-price: which actually makes more money

A mate of mine took on a 1930s semi last spring. Bathroom out, new suite in, retile, reboard, move the soil stack. He quoted it fixed price at £7,800 because that's what the last three bathrooms had come in at. Then he lifted the floor and found the joists had been notched to death by whoever put the old bath in, and the stack was cast iron, not plastic. Four extra days he never got paid for. He still talks about it.

The job wasn't priced wrong. The job was priced in the wrong shape. Fixed price, day rate and cost-plus are three different ways of deciding who carries the risk when a job goes sideways, and the money you make follows that decision more than it follows your hourly rate.

Here's the same bathroom refit priced all three ways, with the numbers, and a straight answer on which one to use when.

The three models, plainly

Fixed price

You name one number for a described scope of work. The customer accepts it. That's the price, whatever happens next, unless you agree a variation. You take the risk on how long it takes and what the materials cost on the day.

Customers love it because they know what they're paying. That's not a small thing, it wins you jobs. The trap is that your profit is now a bet on your own estimate.

Day rate

You charge a rate per day per man, plus materials, usually with a markup on the materials. You give an estimated number of days so the customer has a figure in their head, but the final bill follows the days actually worked.

The customer carries the overrun risk. In exchange they get transparency, and they get twitchy about it, which is why day-rate jobs need a written estimate and a habit of telling people where you are.

Cost-plus

The customer pays your actual costs for labour, materials and plant, and you add an agreed percentage on top. Usually open book, so they see the invoices and the timesheets. Common on larger refurbishments and on work where nobody can honestly scope it up front.

You're nearly risk-free. You're also capped. There is no version of a cost-plus job where you finish three days early and pocket the difference.

One bathroom refit, priced three ways

Say Adam Wójcik trading as Wójcik Building is pricing a full bathroom refit in a 1930s semi. Two men, estimated eight working days. Strip out, first fix, board, tile, suite, second fix, make good.

The costs to the business:

• Materials: £3,100 (suite, brassware, tile backer board, 14m² porcelain, adhesive, grout, pipe, sundries)
• Labour cost: lead at £220 a day, second man at £150 a day. £370 a day, £2,960 over eight days
• Overhead recovery: £95 a day for van, fuel, public liability, tools, phone, accountant. £760 over eight days
• Total cost: £6,820

That £95 a day is the figure most people leave out, and it's the reason a job can feel profitable and still leave nothing in the account at the end of the month. If you haven't worked yours out, divide your annual fixed costs by your realistic billable days. Most 2 to 6 man UK firms land somewhere between £70 and £140 a day per gang.

Option 1: fixed price at £8,500 plus VAT

£6,820 of cost divided by 0.8 gives £8,525 for a 20% margin. Round it to £8,500.

• Runs to plan, 8 days: £8,500 in, £6,820 out. Profit £1,680, margin 19.8%.
• Runs 2 days long: extra cost of £740 labour and £190 overhead. Profit £750, margin 8.8%.
• Finishes a day early: cost drops to £6,355. Profit £2,145, margin 25.2%.

A spread of £1,395 between the good outcome and the bad one, on one bathroom.

Option 2: day rate at £600 a day for the gang, materials at cost plus 15%

£600 a day for two men, materials charged at £3,565.

• 8 days: £4,800 labour plus £3,565 materials = £8,365 in, £6,820 out. Profit £1,545, margin 18.5%.
• 10 days: £6,000 plus £3,565 = £9,565 in, £7,750 out. Profit £1,815, margin 19.0%.
• 7 days: £4,200 plus £3,565 = £7,765 in, £6,355 out. Profit £1,410, margin 18.2%.

Look at what happened there. The spread is £405 instead of £1,395, and the worst case is the job that finishes early. That's day rate in one line: you stop losing money on bad days and you stop making extra on good ones.

Option 3: cost-plus at 20% markup, open book

• 8 days: £6,820 × 1.20 = £8,184 in. Profit £1,364.
• 10 days: £7,750 × 1.20 = £9,300 in. Profit £1,550.
• 7 days: £6,355 × 1.20 = £7,626 in. Profit £1,271.

Lowest profit of the three at every single outcome. That's not an argument against cost-plus, it's an argument against using 20% on a job this size. On a domestic refit the admin of open book eats the difference. Cost-plus earns its keep on six-figure work where 15% of a big number is a real wage, and where nobody could have scoped it honestly anyway.

Markup is not margin, and the gap is your wages

This one quietly costs people thousands a year.

Markup is a percentage added to your cost. Margin is a percentage of the final price. They are not the same number.

• Cost £6,820, add 20% markup, price £8,184. Profit £1,364. Margin is £1,364 ÷ £8,184 = 16.7%.
• Cost £6,820, want 20% margin, divide by 0.8, price £8,525. Profit £1,705. Markup was actually 25%.

Someone adding "twenty percent" to every job and thinking they're on 20% is running 3.3 points light. Over £250,000 of turnover that's roughly £8,000 of profit that never existed.

The quick conversion: to turn a target margin into a divisor, subtract it from 1. 15% margin, divide cost by 0.85. 20%, divide by 0.8. 25%, divide by 0.75.

Which model for which job

Pick by how well you can see the job, not by what you usually do.

Use fixed price when

• You've done this job type repeatedly and your last five came in within a day of estimate.
• The property is post-1990 or you've already opened up and looked.
• The scope is genuinely closed: a consumer unit change, a boiler swap, a standard fencing run, a new-build second fix.
• You're competing against other firms and the customer is comparing numbers. Fixed price wins the tender.

Use day rate when

• Pre-1940 property, or anything with a previous owner's DIY in it.
• Remedial work, chase-outs, snagging someone else's job, chasing a leak.
• The customer keeps saying "and while you're there".
• You're waiting on someone else's programme and your days are at their mercy.

Use cost-plus when

• Large refurbishment or extension work where the design will move during the build.
• The customer is engaged, wants involvement, and will actually read an open-book account.
• Listed buildings, structural surprises, insurance reinstatement work.

Plenty of firms run hybrids and they work well. Fixed price the parts you can see, day rate the parts you can't. "£6,400 fixed for the bathroom as specified, plus £600 a day for any structural works to the joists, agreed in writing before we start them." Customers accept that far more readily than most trades expect, because it's honest about what's known and what isn't.

The paperwork that makes any of it stick

A pricing model is only worth what your documents say it is.

Quote or estimate, pick the right word. A quote is a fixed price and you're bound by it once accepted. An estimate is an informed indication that can move. If you're working to a day rate, the document should say estimate, state the day rate per man, the estimated number of days, and how additional days get agreed. Putting "quote" at the top of a day-rate job and then billing twelve days against an eight-day figure is how disputes start.

Variations go in writing before the work, not after. Under the Consumer Rights Act 2015 a customer only owes you for what was agreed. Where no price was agreed at all, section 51 says they pay a reasonable price, which means you get to argue about the meaning of reasonable with someone who has already spent their budget. A one-page variation order signed on the phone photo takes ninety seconds and removes the argument entirely.

Payment terms, in the document. Stage payments on anything over about a fortnight's work, and a late-payment interest clause in your terms. For business customers the Late Payment of Commercial Debts (Interest) Act 1998 gives you statutory interest automatically. For homeowners you only get interest if it's in terms they agreed before the work started.

Keep the timesheets on day-rate jobs. Not for the customer's benefit, for yours. If it ever goes to Money Claim Online in England and Wales, or the Simple Procedure in Scotland, a dated day-by-day record of who was on site and what they did is the difference between a claim and a disagreement. Citizens Advice publishes the consumer side of this, and it's worth reading what your customer is being told.

What NOT to do

1. Don't fixed-price a property you haven't opened up. If the survey is "I had a look round on a Tuesday evening", that's not a survey. Either price the visible work fixed and the hidden work at day rate, or build a contingency in and say so.
2. Don't run day rate without a written estimate of days. Open-ended day rate feels safe to you and feels terrifying to the customer. They'll take the fixed-price firm instead. Give them a range and a rule for extending it.
3. Don't confuse markup with margin. Covered above. It's the most common quiet leak in a trade business and it never shows up as a bad day, just as a thin year.
4. Don't leave overheads out of the cost base. Labour and materials are not your costs. Your costs include the van, the insurance, the fuel, the accountant, the phone, the tool replacements, and the days you spend quoting instead of working. Price against a cost that includes them or you're funding your own business out of your wages.
5. Don't do extra work on goodwill and bill it later. "I'll sort you out at the end" is how four unpaid days happen. Agree it before, in writing, every time, even with the nice ones. Especially with the nice ones.

The short version

Fixed price pays best on work you know. Day rate protects you on work you don't. Cost-plus is for the jobs nobody can scope, and it should carry the admin cost in its percentage.

The firms that make money aren't the ones with the highest day rate. They're the ones who match the pricing model to what they can actually see, then write it down properly before anyone lifts a floorboard.

If you're rebuilding your quote template around this, the fixed-price and day-rate forms in the pack above are already set up for it, variation order included.