The movie begins with the Baker family arriving late to Lorraine's high school graduation. Their eldest daughter Nora (Piper Perabo) is now married to Bud McNulty, pregnant and is moving to Houston with Bud because of his new job promotion. Tom says that the Bakers should have beat the Murtaughs at the Labor Day family competition. Tom decides that since the family is breaking apart they should all go to Lake Winnetka for one last family vacation together. So the family goes to the lake to a very old and rustic house which they are not impressed with.
At the party, the family stands out, as they were not told that the party was a smart occasion while they come casually dressed, arriving to find everyone else smartly dressed. Meanwhile, the Bakers run into the their rivals the Murtaughs. The kids make friends with each other. Mark and Jake bring fireworks to the clambake. Mark puts the book bag down sending the fireworks shooting everywhere. The next day, Tom wakes everybody up for breakfast and he thinks that having a camp out will bring the family together, so they all put up tents and sit around the campfire. They have a singing match with the Murtaughs around the lake. Then Jimmy comes and invites the Baker family over to their home. When they arrive, Tom is furious by how boastful Jimmy is and asks Sarah to play a trick on Jimmy in return for not being punished. She places meat in Jimmy's seat and releases their dog (who loves meat a lot, as seen in the previous movie). Things do not go exactly as planned, as Tom and Jimmy trade places so Tom can sit beside Kate. However, Sarah succeeds in destroying Jimmy's priceless crockery, which he claims he got from the King of Thailand. However, Jimmy sarcastically assures the family it is no big deal.
Eliot Murtaugh (Taylor Lautner) and Sarah start to develop a bond - at one point, when they are going knee boarding, Tom (who is worried that Sarah will ignore him as well) goes with wearing a wetsuit and elects to go first. However, he falls over, but does not let go and gets dragged a long way across the lake before being discovered by Sarah, who is angered that he has embarrassed her. Her relationship with Lorraine is also damaged slightly when Lorraine tries to console her, only to be snapped at. Meanwhile, Charlie, and Anne talk about their future. Anne wants to leave Harvard and start painting and Charlie says that he wants to move up here and open a garage. Jimmy challenges Tom to a Labor day Competition, to which Tom agrees, despite promising not to. Sarah steals some makeup from a shop as she was too embarrassed to use her mother's makeup or to buy her own, so Kate explains that she looks good as she is and that all girls will eventually start buying makeup. However, she is slightly hurt that Sarah did not come to ask her for help. Tom makes a practice schedule for the competition and tells the kids they can no longer associate with the Murtaugh family. However, Eliot asks Sarah out on a date and kisses her on the cheek. Tom quickly agrees, but Sarah then refuses to leave the bathroom when Nora needs it, calling for Lorraine, who comes over and gives Sarah a makeover (something she has wanted to do since the first movie). Sarah then leaves for her date. However, Tom, anxious to see how his daughter's first date is getting on, goes to the movie they are watching to spy on them and unfortunately gets into a fight with Jimmy (who is also spying on Eliot) about "the move" (Eliot puts his arm around Sarah in the middle of the movie) and as a result, makes himself known to Sarah and Eliot, so they don't get a chance to kiss. Sarah storms home afterwards in a fit of anger and declares she is not attending the Labor day competition the next day. The entire family is astonished that Tom would sink so low as to spy on his daughter's first date and berate him, comparing him to Big Brother.
The next day is the competition but the only people who are going to help Tom are his younger twins. Kate stays with the rest of the family. In the rat’s hole, they find the old family flag. They then race to Tom's aid and join him in the nick of time. The competition goes to a tie-break canoe race but Nora goes into labor partway through the race. The Murtaughs try to stop and help, but Jimmy, sensing the opportunity to defeat Tom once and for all, refuses. However his eight kids, for once, defy him and get out of the boat to help the Bakers. Sarina announces to him that his kids like the Bakers, that his rivalry with Tom was before any of them, including herself, were born and that he should listen to them, unless he wants to start looking for a new wife. He reluctantly agrees. They head to shore and the two families work together to take Nora to the hospital.
Tom waits in the waiting room with his kids and the Murtaugh family. Anne tells her dad that she is leaving Harvard. Jimmy objects at first, but Sarina reminds him to listen to their kids. Charlie tells Tom that he is opening a garage here. Both Jimmy and Tom accept these facts when they can go see Nora’s baby. Nora says they are going to name the baby Tom because he has taught them so much that there is no way to be a perfect parent, but a million ways to be a good one. Tom sheds a tear as he holds his new grandson. The next day, Bud and Nora buy the house on Lake Winnetka. That night Tom and Kate dance together on the dock and it starts to float away.