Fixed Price, or Cost Plus? Many new home buyers are surprised to learn that construction contracts are not all formatted the same way. This can be somewhat confusing if you’re not already familiar with these contract formats, and you will hear builders make great arguments as to why their preferred contract format is “the best”. Which way do I think is the best? That’s not an easy answer, except to say in my opinion it depends on the size and scope of the project. In my experience large custom projects tend to work best with Cost Plus contracts, while more standard homes and small remodels can work better as Fixed Price contracts.
Let’s start with Fixed Price: A set of plans and specifications is agreed on between the customer and builder. The builder then gathers pricing from their subcontractors and suppliers. After adding up all the costs and applying a profit margin, the builder quotes a “Fixed Price” which will not change unless the customer decides to change the plans or specifications. For smaller, simpler projects like standard homes and small remodels, there aren’t as many details to figure out so it’s feasible for the builder to gather all the numbers and be able to feel confident in quoting a price that won’t change. That said, if the customer decides to upgrade or downgrade their selections, price adjustments will of course need to be made in the form of change orders.
Cost Plus contracts work a little differently. A set of plans and specifications will still be needed to generate a preliminary cost estimate, but in this case the specifications don’t need to be as detailed. Why not as detailed? Because with a Cost Plus contract, the customer agrees to pay the amount of all the subcontractor & supplier invoices, plus the builder’s profit margin. This allows builders and their customers to get the project started and figure out the specifications as they go. Imagine how long it would take to pick out every little detail for a large custom home… Both the builder and the customer usually get overwhelmed by the amount of time this would take to do before the project can begin, so it’s often more realistic to use the Cost Plus format and make these decisions over the course of the project. Because many of the selections have not been made at the starting point of the project, the builder and customer will typically establish “allowances” for what they think will be a reasonable amount of money for each category of the project. The allowances are adjusted by change orders when final selections are made.
There are other nuances of these two contract types that could take pages to text to explain. Often times our recommendation is to look at each project individually and come to a mutual agreement on which type of contract makes the most sense. If you would like more information on contract types, or have a project you would like to discuss please contact us