Cost-plus or fixed price on a custom home?
Both contracts can work. The question is where the risk sits, and whether the owner can see it.
Every construction contract answers one question: who carries the cost of the unknown? On a simple, fully designed building, the unknowns are small and a fixed price can work well. On a custom house on a complex site, the unknowns are large, and the answer matters a great deal.
How a fixed price handles risk
With a fixed price, the builder commits to a number before the work begins. To protect that number, the builder adds contingency for every unknown: the ledge that might be there, the lead time that might stretch, the detail that isn’t fully drawn. If those risks don’t appear, the contingency is kept as profit. If they do, the conversation turns to change orders and allowances. In both cases the owner rarely sees the cost behind the price.
How cost-plus handles risk
With cost-plus, the owner pays the actual cost of the work plus a stated fee. Unknowns are paid for only if they appear. The owner pays for what the house actually costs, no more and no less.
The concern people raise is that cost-plus has no ceiling. That is true only if the builder isn’t managing to a budget. A cost-plus contract is only as good as the controls that come with it.
What makes cost-plus work
- A budget built during design, so the owner hears the cost of a decision before it is locked in.
- A schedule of values that serves as the contract, the budget and the bill, line for line.
- Regular requisitions with full backup, so every dollar traces to an invoice or receipt.
- Budget to actual on every bill, so variance shows up while there is still time to respond.
- Written change orders, priced before the work proceeds and tracked separately from base scope.
- Lien releases on every payment, so no one who has been paid can place a lien on the property.
Which one is right
If the design is complete and the site is simple, a fixed price can be a sensible choice. If the design is still developing, the site carries real unknowns, or you want to see where your money goes, open-book cost-plus with commercial-grade controls tends to deliver a better house for a fairer price.