Which Is Better, Cost Plus Or Fixed Price Home Building Contract?

When Building A Home, Which Is Better A Cost Plus Or Fixed Price Contract?

With a Fixed Price contract you know exactly how much you are going to pay for your new home, unless you exceed the mutually agreed budget amounts or change the scope of the construction agreement. If the cost of material and labor increases during the construction period or the Builders estimated costs are low, you still pay the same signed contract amount. The Builder is assuming the risk of cost increases. Since the Builder is subject to more risk in this type of transaction the Homeowner pays a little more.

With a Cost Plus, the Builder provides an estimate of the building costs prior to contract signing and the buyer assumes the risk for any variance. A cost plus contract, due to it's nature is open ended. Neither the Buyer nor Builder know the final cost of the home until the project is completed. The Builder is paid a Fixed Fee or % over the actual costs for overhead and profit. Periodically, the Builder provides an analysis detailing budgeted costs vs actual and cost to complete so the Buyer know where they stand in relation to the final cost of the build. With the cost-plus basis, the homeowners know their actual costs on an ongoing basis. This helps eliminate any potential surprises when the project is completed. In this type of contract the Buyer assumes more risk so there is a potential savings.

Some Homeowners select a Cost Plus Contract because they want to make sure the Builder isn't over charging them. That's not a wise decision.

It's been said, "You can't get a fair deal from a dishonest person". I like that quote because that's what I've experienced in business. If you can't get to the point where you trust the one you are doing business with, RUN! Doing any deal with somebody that's dishonest is going to end badly. A "Crook" spends almost every minute thinking about new ways to rip you off. The average person can't out maneuver a crook, it's what he does for a living. It's like going to a Carnival thinking you can win a "Cupid Doll" playing a Carnie's Rigged Game. It's not going to happen, it's a rigged game. 

Wade slowly into a home building relationship and do your upfront homework. Read my blog post "How to Select A Custom Home Builder" and make a wise decision. Like I said, if you can't get to the point where you trust the Custom Home Builder you are about to sign a contract with, "RUN"! 

Choose a Cost Plus Contract if you are comfortable not know how much your home is going to cost before you build, knowing that you are determining the final outcome by the choices you make.