Part 2: Fixed Price vs. Cost Plus

Should I Use a Fixed-Price
or Cost-Plus Contract?

Silk Stocking District (Talladega) (Photo credit: Wikipedia)

Part 2–Cost Plus
A cost-plus contract differs from a fixed-price contract in that it takes
the actual cost of building the home and adds a fee for the builder’s
overhead and management. This fee can be either a lump sum (flat fee)
or a percentage of total costs. Of course, neither you nor your builder
will know the exact bottom line for the building costs until the final
accounting is completed shortly after closing. A good builder will give
you an accurate cost estimate, but it’s exactly that—an estimate—until the
final accounting. With a cost-plus contract, you’ll pay the actual costs for
all labor and material, plus the builder’s fee.
A cost-plus contract can be advantageous when building larger, custom
homes with finish levels and other things changing during the process.
With the cost-plus basis, the homeowners know their actual costs on
an ongoing basis. They can then determine where they will appropriate
their funds early in the construction process and receive a full accounting
disclosure of all costs. If they elect to pull out a magnifying glass to search
for scratches in all the panes of glass, they can choose to have those panes
of glass replaced at their cost.
Usually, doing business on a cost-plus basis keeps the magnifying glass
in the drawer. It doesn’t mean the builder builds with less care or quality;
it just puts the homeowner and the builder on the same team. A cost-plus
contract provides the synergy of identifying problems and determining
win/win solutions that are in the best interests of the homeowner.
If you trust that your builder is competent and is working on your
behalf, and if you are comfortable not knowing your exact total costs until
the end of the project, then a cost-plus contract may be best for you. Your
final cost will depend on the choices you make. Your builder will charge a
smaller management fee on a cost-plus basis because he assumes less risk.
Both fixed-price and cost-plus contracts are successfully used in
building new custom homes. You can decide which one works best for you.