There are two main billing structures in residential construction: fixed price and cost plus. We’re often asked which billing style we offer at Black Boot Builders or which we prefer. The honest answer is that we work with both contract structures, although we have found that certain types of projects (and client personalities) suit one structure better than another.
Understanding the difference between these contract structures helps you choose the best option for your project and understand how you’ll be billed throughout construction. Not understanding the difference between these two contract types can lead to misaligned expectations about cost, billing, and risk.
Fixed price construction contract
The fixed price model is generally easy to understand and is probably what most people picture when they think of a construction contract. Fixed price construction contracts usually have a single price associated with a defined scope of work. In these contracts, the builder agrees to build that scope for a defined price. When the client signs the contract, they know the contract price before construction begins.
A fixed price model has several advantages. Many clients are comfortable with this structure because it provides greater cost certainty upfront. Clients also usually have a better idea of their billing schedule throughout the project. They may receive a list of milestones due at different stages of the project.
From a builder’s perspective, a fixed price contract can carry more risk because there’s less flexibility when actual costs differ from the estimate. Because the builder agrees to a price upfront, the client expects to pay that price unless the contract allows approved change orders or other adjustments. If the builder underestimates or misses something during estimating, the builder may ultimately absorb the additional cost.
Because the builder assumes more cost risk, fixed price estimates also need to account for uncertainty. Where a cost cannot be precisely determined before construction, a contractor may include an allowance, contingency, or other reasonable amount to account for that risk.
One tradeoff of fixed price billing is that clients may not directly benefit when actual construction costs come in below the builder’s estimate. If you sign a contract for a certain price and the work ultimately costs the contractor less than expected, the client typically does not receive the difference unless the contract provides otherwise. Speaking from experience, it’s rare for a job to come in significantly under budget, but this is still an important distinction with a fixed price contract.
Cost Plus Construction Contract
Cost plus, or “open book,” is another contract structure common in residential construction. In this model, clients are billed based on the actual costs incurred for their project. Instead of paying a defined contract value, clients pay the actual cost of the work plus a contractually defined fee or markup for the builder’s overhead and profit.
A builder should still estimate every project in full, even if it’s a cost plus contract, so the client still receives an estimate of anticipated project costs before construction begins. However, the final price is more flexible in this scenario and is not guaranteed. Depending on the project, the builder may provide an estimated range or identify a reasonable variance around the anticipated project cost.
The main advantage of this open book contract billing style is transparency. Because a client is billed based on actual project costs, they can usually see the bills and receipts that make up their project cost. A cost-plus client will generally receive significantly more detail on their bills about where project dollars were spent. In this scenario, it’s also common for the builder’s fee or markup to be clearly defined in the contract. Conversely, a builder’s internal markup is not typically itemized for a client on a fixed price project.
Because of this, monthly billing can vary significantly as construction progresses. On a cost-plus project, it’s difficult to predict an exact monthly bill in advance because it depends on labor hours worked that month, materials purchased, and subcontractor/supplier bills received. For this reason, it can be harder for clients to map out cash flow because their monthly bill reflects the pace and type of work happening in real time—and those costs aren’t always predictable 30 days in advance.
Which Is Right for Me?
Deciding which contract type is right for you depends on several things. First, what is your comfort level with flexible billing? If you prefer known billing milestones and want to plan your finances well in advance, a fixed price contract might better suit your priorities. On the flip side, if you value detailed cost transparency and want to understand the individual expenses that make up your project, a cost-plus contract could be a good choice.
We also consider the type of project when suggesting a contract structure. If it’s a new construction house, we generally suggest a fixed price contract because there tend to be fewer unknown variables. These projects are often easier for us to estimate in detail and price confidently before construction begins. Conversely, if you have a 100+ year-old old home in the city, there may be unknown conditions hiding behind the walls. In that case, an open book cost-plus project may make more sense.
We also consider timing and flexibility when defining client contracts. If a client approaches us months or years before construction, we have plenty of time to develop a fully fleshed-out estimate and better prepare for a fixed-price project. If a client is working with a more compressed timeline to start (or finish) their project, cost plus may be a better fit for both parties. We can still give the client an idea of what the project will cost, but the structure lets us start sooner and adjust as we go.
Cost-plus projects tend to be more flexible because the project team can pivot as needed. With fixed price, if the scope or level of finishes changes, we generally have to issue a change order, whether positive or negative, against the contract price. That can slow things down and create an extra layer of formal documentation. With cost plus, changes can often be incorporated more fluidly because billing is based on the actual costs incurred. A client can add, eliminate, or modify something without first redefining an already established fixed contract price.
You should also consider how transparent you want the billing process to be. On a cost-plus invoice, we might list in detail the types of materials purchased for a project, from nails to glue to lumber. To some people, that level of detail feels excessive, and they might not have the time or interest in reading that information. To others, that level of financial detail builds trust and helps clients feel like they’re part of the project.
Fixed Price
Better for Clients Who:
- Want a defined contract price for the project upfront
- Prefer to have greater predictability around project cash flow
- Have started preparing for their project months or years ahead of time
- Don’t anticipate making significant changes throughout the project
- Understand that the pre-construction process may take longer as more details are sorted out ahead of time
- Are working with a bank on a construction loan
Cost-Plus
Better for Clients Who:
- Want a good idea of costs beforehand, but are comfortable with variable billing
- Want more freedom to make changes during construction
- Want to keep progress moving and prioritize the timeline and overall flexibility over having a fixed contract price
- Have a genuine interest in understanding more about construction and seeing the individual costs that make up a project
- Have spent less time in pre-construction and still have finish decisions to make
Overall, neither contract structure is inherently better than the other. The right fit depends on the client’s expectations and comfort level, the type of project, and the timeline for construction. Before your project begins, talk with your builder about the custom home construction contract structures they offer and which approach makes the most sense for your specific project. At Black Boot Builders, we’ll discuss the contract options with you while weighing the unique characteristics of your project.
Fixed-Price vs. Cost Plus Construction Contract FAQs
What is a fixed-price construction contract?
A fixed-price construction contract establishes a set price for the project before construction begins. The builder assumes more of the risk for cost increases, while the homeowner benefits from greater budget certainty and a clearer understanding of the total project cost upfront.
What is a cost plus construction contract?
A cost plus construction contract allows the homeowner to pay for the actual cost of labor, materials, and other project expenses, plus an agreed-upon fee for the builder. This contract offers greater transparency and flexibility, making it a common choice for custom homes with evolving designs or selections.
Which custom home construction contract is better?
Neither contract type is better. A cost plus contract may be ideal for homeowners who want flexibility and detailed visibility into project costs. A fixed-price contract may be better for those who prioritize budget predictability and prefer to know the final cost before construction starts. The right choice depends on the project’s complexity, the homeowner’s goals, and the level of flexibility desired throughout the build.
