Cost Plus Contract versus the Fixed Price Contract

by Larry Clay

In the residential custom home industry, there are two contract types; fixed price and cost-plus. Homeowners need to understand each type of contract and decide which one best fits their needs.

Cost Plus
The cost-plus contract charges the cost of all materials and labour plus an agreed upon percentage applied to all costs of the construction of their home. With a cost-plus contract the homeowner assumes the risk of unexpected expenses and cost over runs. It is imperative that a thorough budget is complete and costs are tracked weekly. This is the value an experienced builder will bring to your project. In most cases, the cost-plus contract will cost you less since the builder and sub-trades do not need to pad their prices for the unexpected or unknown.

Fixed Price
The fixed-price contract guarantees the price you will pay for your home plus change orders. This provides peace of mind to the homeowner and for some, this is critical. The builder will assume the risk of the unexpected and unknown but will need to pad some prices to cover the possible surprises. You will pay more for the peace of mind.

Best of Both
Can you get the best of both? Can you receive the lower costs of the cost-plus and the peace of mind of fixed-price? Yes, this is entirely possible. An extremely thorough budget will allow you to adjust the features and finishes before the start of construction to fit within your comfortable spending limits. Weekly invoices allow you to make mid-course corrections in the event an unexpected cost occurs. Few builders have the experience and business systems to accurately deliver a thorough budget and timely reporting to keep homeowners sufficiently informed.

Choosing a builder that can deliver what they promise will make the difference between a nightmare and an enjoyable building experience. Choose wisely and have fun spending!