Cost Plus vs Fixed Price – Which is better for the customer?

There are pros and cons to both of these approaches. Both can lead to a successful project when dealing with a skilled and honest builder. Both can be a disaster with an inxperienced or dishonest builder. The pros and cons of each are derived more from the complexity of the house, fluxuation in market conditions, builder motivations, and goals of the customer.

Fixed Price

A fixed price contract for building a home involves the builder giving a guaranteed price for the complete home. The builder will set up allowances for the various selections that the customer will be making. If the customer spends more than the allowance amounts, the customer must pay the difference. Otherwise, the customer knows exactly what he or she will be paying for the house.

The builder takes the risk of cost overuns and incorrect estimating. Customers completely control the final cost of the house.

Builder profit is not transparent. Builders motivation is to spend as little as possible. Temptation for builder to choose the cheapest alternative when specifications are unclear. More difficult to determine what bills are being paid by the builder. Built in contingency costs that may or not be needed.

Works best for
Customers who are uncomfortable not knowing exactly what the final cost will be. Less complicated houses. Situations where the vast majority of selections have been made prior to breaking ground. Customers working with a very specific budget. Inflationary environment.

Cost plus a percentage

A cost plus a percentage contract is an arrangement where the customer is charged the actual costs of the house plus a percentage which is added on top of that as a builder fee.

More transparency of costs and builder fee. Decisions can be made with a team approach. Changes are less costly. More decisions can be made during the build process. No temptation for builder to cut corners. Customer is not paying for builder to take on risk of cost overruns if there aren’t any.

Customer takes on risk of cost overuns and incorrect estimating. Final cost is unknown. Temptation for builder to underbid project to earn the business. Builder is rewarded for cost overuns with increase in builder fee. Builder is penalized for saving money by reduced builder fee.

Works best for
More complex houses. Remodels. Houses with loosely defined scope. Stable or deflationary environment. Customers who would like to make selections later in the process. Customers more interested in getting exactly what they want than managing to a strict budget.

Cost plus a fixed fee (Variation on Cost Plus)

A cost plus a fixed fee contract is similar to the Cost plus a percentage contract except the builder fee is a fixed amount regardless of the actual cost of the house.

This variation on the Cost plus model has the same pros and cons except that the builder motivation issue is corrected. Since the builder fee is fixed, the builder is not rewarded for cost overruns. The builder is also not penalized for coming in under budget.

In cases where the scope of the project is difficult to nail down or define, such as remodels, this can be a more difficult approach to employ.

Final Thoughts

None of these formats is a substitute for a qualified builder with integrity. All of these contracts can be manipulated by an unscrupulous builder. None of them can protect you from an incompetent builder. The best approach is to work with someone who has a good longstanding reputation for building quality homes on budget and on time. It is also important to have a good personality fit because building your dream house should be a fun experience!

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