Fix-Price Contract Versus Cost-Plus Contract: Which is Best When Building a New Home?

Published March 1, 2024

When building a new custom home, a fixed-price contract, and a cost-plus contract are two primary contract structures that homeowners and builders might consider. Both have their advantages and disadvantages, depending on the specific situation and the parties involved. Here are some reasons why some people might prefer a fixed-price contract over a cost-plus contract:

Budget Certainty

With a fixed-price contract, new-build homeowners know the exact price they will pay for the completed home, which allows for precise budgeting. This certainty can be particularly important for individuals who have strict financial constraints.

Risk Transfer

In a fixed-price contract, the risk of cost overruns is borne by the contractor, not the homeowner. If unforeseen issues arise that increase costs, it’s typically the contractor’s responsibility to absorb those additional costs.

Simplified Financial Management

A fixed price means there’s no need to continually monitor and approve every expense of your custom home. This can reduce the administrative burden on the homeowner.

Avoid Disputes

A fixed price can minimize disputes related to the costs of building a custom-tailored home. In a cost-plus scenario, disagreements might arise about whether certain expenses were necessary or reasonable.

Incentive for Efficiency

Contractors under a fixed-price arrangement have a financial incentive to manage the project efficiently and find cost-saving measures, as they will benefit directly from any savings.

Clear Scope & Specifications

Fixed-price contracts often require a clearly defined project scope and detailed specifications for building your home. This clarity can reduce ambiguity and misunderstandings between the homeowner and the custom builder.

Predictable Timeline

While not always the case, fixed-price contracts can sometimes provide a more predictable home-building project timeline, as the builder may want to complete the project promptly to avoid increased labor or holding costs.

The choice between a fixed-price and cost-plus contract depends on the homeowner’s priorities and risk tolerance when bringing their custom home vision to life. If budget certainty and risk aversion are paramount, a fixed-price contract might be preferable. For those willing to take on a bit more risk for potentially more significant savings or desiring more transparency, a cost-plus contract could be the right choice.

For an experienced, trustworthy team you can rely on to build your dream home, consider LaFollette Custom Homes for our simple 5-step process and combined experience of over 65 years. Our Custom Home Consultant will prepare a preliminary estimate to give you a ballpark idea of the cost of building your home and your Superintendent and Interior Designer will meet with you regularly throughout the construction process. Contact us today to get started.



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