The contract you sign with your custom home builder sets the foundation for the entire project. Whether you sign a fixed-bid or cost-plus contract depends on your budget flexibility, your desired move-in date, and other factors our builders can help you consider.
If you sign a fixed-bid contract, you agree to a particular flat fee calculated by your builder. You don’t have to worry about the project going over budget with this type of contract, but the bid might be higher to compensate for that. If you sign a cost-plus contract, you agree to pay a certain amount to the builder plus the cost of building materials and finishes as you make design decisions. A cost-plus contract lets you break ground sooner and is a great choice for homeowners who want to be able to make easy design changes during construction.
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The most common types of contracts homeowners sign with custom home builders are fixed-bid and cost-plus contracts, both of which serve homeowners in different situations, with different budgets, and on different deadlines.
With fixed-bid contracts, builders and homeowners agree to one flat amount for the entire project. Overruns are not the homeowner’s responsibility, but the contractor’s, so everything is done to keep the project on budget and on time.
The amount you agree to in a fixed-bid contract is the amount you pay, even if a custom home build comes in slightly under budget.
Builders need finalized construction plans to make an accurate bid that they can execute without going over budget. You should not sign a fixed-bid contract if you are still in the process of confirming construction plans and design decisions, as a contractor cannot give you an accurate bid at that stage.
With cost-plus contracts, a contractor is paid for all allowable construction expenses, plus an extra fixed amount to allow for the contractor’s profit. When homeowners sign cost-plus contracts with builders, they can set a guaranteed maximum price to ensure the build does not exceed what they are comfortable paying in total.
Cost-plus contracts aren’t for all homeowners, as there is more uncertainty in total cost than there is with fixed-bid contracts.
Fixed-bid contracts may be the right choice for homeowners with strict budgets, set construction plans, and predictable construction costs.
If you have a strict budget for your custom build, a fix-bid contract may be best. You can sign a contract and agree to pay a very specific amount for all materials, labor, and other construction costs, and not a penny more.
Homeowners with finished blueprints and clear visions for what they want their custom homes to look like may also benefit most from signing fixed-bid contracts. If your construction plans are unlikely to change and you don’t foresee yourself making last-minute design decisions, consider a fixed contract.
Fixed-bid contracts are also appropriate when construction costs, such as labor, building materials, and permits, are predictable. If you are sourcing hard-to-find tile or other luxury finishes that could experience supply chain issues or other delays, a fixed-bid contract may not be the right choice for your custom home build.
Cost-plus contracts may be the right choice for homeowners who have not finalized construction plans, have flexible budgets, and want to start construction as soon as possible.
If you don’t have a clear scope or vision for your custom build, signing a cost-plus contract may be the best route. This type of contract gives you the freedom to easily make design changes throughout construction in ways that a fixed-bid contract would not.
Cost-plus contracts are also often preferred by homeowners with flexible budgets. If you don’t have to set a very strict limit on your spending, there is less risk involved in a cost-plus contract.
Construction on cost-plus contract homes typically starts sooner than fixed-rate contract homes, as designs do not need to be completely finalized before any preparation work begins. You can make adjustments and changes as you proceed that shorten the construction timeline.
Along with the pros, there are certain cons to signing fixed-bid contracts that homeowners should be aware of before making a decision.
Fixed-bid contracts might include higher upfront costs, as builders have to factor in the ever-changing cost of materials, disruptions and delays in the supply chain, and other factors that might lead to overruns, which the contractor would absorb under this kind of contract.
Fixed-bid contract homes might take longer to begin construction, as plans must be completely finalized first. Once construction starts, however, a fixed-bid contract house might be built faster because it isn’t as easy to make changes.
Fixed-bid contracts make it hard for homeowners to make changes or additions to a custom home build once construction has begun, as formal change orders are typically required.
There are also potential downsides to signing cost-plus contracts that homeowners should consider before deciding which route to take with their custom builds.
With a cost-plus contract, the exact cost of the project is not known until construction is complete. Homeowners need to constantly review expenses and purchases to make sure they are appropriate and allowable under the contract, which may mean more involvement with the day-to-day of custom home construction than they hoped.
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