One of the most important decisions you’ll make when planning a home remodel is whether you will use a fixed-price or a cost-plus contract. Not sure what this means? Not to worry – once you know the difference, you’ll be one step closer to answering some of the top questions people ask about their remodel, including, “Will my remodel stay within budget? Will it finish on time? And how much effort will I need to put into tracking expenses and managing the project?”
At Lamont Bros., we’ve seen firsthand how choosing the right type of contract can simplify the process, reduce stress, and help homeowners achieve their goals. At the same time, we’ve also seen how homeowners have faced friction and frustration throughout their remodel by signing a contract that wasn’t the right fit for their needs or expectations.
In this article, we’ll walk you through the differences, advantages, and challenges of both fixed-price and cost-plus contracts. While these terms might seem technical, the differences between them will have a direct impact on your experience as a homeowner, including how much control you have, how predictable your costs are, and how smoothly your project will run.
In this article, we’ll cover:
- The Difference Between Fixed-Price & Cost-Plus Contracts
- Advantages and Disadvantages of Both Options
- How to Decide Which Type of Contract is Right For You
- Which Type of Contract We Recommend at Lamont Bros.
What Are Fixed-Price and Cost-Plus Contracts?
When you hire a contractor to remodel your home, they will have you sign a construction contract before beginning the work.
The contract will outline the cost structure of your project in one of two ways.
Fixed-Price Contract
A fixed-price contract is an agreement where the total cost of the remodel is determined before construction begins.
This price is based on a detailed, pre-determined scope of work, including finalized design plans, material selections, and construction specifications. Once agreed upon, the contractor takes on the responsibility of completing the project within the defined budget and timeline.
Cost-Plus Contract
In a cost-plus contract, the homeowner pays for the accrued cost of materials and labor, plus an additional percentage or fee for the contractor’s overhead and profit.
Unlike fixed-price contracts, cost-plus agreements operate on a more flexible pay-as-you-go model, as the scope of work can evolve as the project progresses.
Advantages of Fixed-Price Contracts
Many homeowners appreciate the control and predictability that a fixed-price contract offers. Here are some of the advantages of using a fixed-price contract over a cost-plus contract.
1. Predictable Costs
With a fixed-price contract, you’ll know the total cost of your project before construction begins. This provides financial clarity and peace of mind, especially for homeowners who want to avoid unexpected expenses.
2. Comprehensive Planning
Because fixed-price contracts require a detailed design before construction, you can ensure that every aspect of your remodel is planned out and accounted for. This minimizes surprises during the construction phase and helps keep the project aligned with your vision.
3. Risk Management
In this model, the contractor assumes most of the financial risk for cost overruns or delays. If unforeseen issues arise in completing the scope of work, the contractor typically absorbs the cost. However, in some rare cases, unforeseen circumstances may require a change order if the issue requires an update in the scope of work.
4. Minimal Homeowner Management Required
Once construction begins, fixed-price contracts require little involvement from the homeowner. There’s no need to review receipts or approve individual expenses, allowing you to focus on other priorities while the contractor manages the details.
Advantages of Cost-Plus Contracts
For homeowners who appreciate flexibility and the opportunity to have a more direct role in managing their project, a cost-plus contract may be a better option than a fixed-cost contract.
1. Design Flexibility
Cost-plus contracts are ideal for homeowners who prefer to adjust designs as they go. Because there’s no rigid scope of work tied to the price, you have the freedom to make changes throughout the process.
2. Faster Start
Since cost-plus agreements don’t require finalized plans upfront, construction can begin sooner. This is helpful for projects where immediate action is necessary or when designs are still being developed.
3. More Contractor Freedom
Without a strict budget to adhere to, contractors have greater flexibility to focus on craftsmanship and solving complex challenges that may arise during the build. This approach works well for unique or intricate projects where precision matters.
Challenges of Fixe- Price & Cost-Plus Contracts
Both types of contracts will also come with a handful of disadvantages that may or may not be relevant to your remodeling needs. Here are a few of the more common ones to watch out for:
Disadvantages of Fixed-Price Contracts
Because they rely on the completion of design plans in order to estimate the project cost, fixed-price contracts tend to present the following challenges:
- Limited Design Flexibility: Once construction begins, changes to the scope of work may require a formal change order, which can add time and cost to the project.
- Longer Pre-Construction Phase: Detailed design and budgeting take time, often delaying the start of construction compared to cost-plus projects.
Disadvantages of Cost-Plus Contracts
Without an upper-cost limit, cost-plus contracts often function as a “blank check” to your contractor, and may involve the following risks:
- Unpredictable Costs: Without a set budget, expenses can spiral out of control, leading to financial strain or unfinished projects.
- More Homeowner Involvement: You’ll need to review and approve expenses throughout the project, which can be time-consuming and stressful.
- Higher Chance of Disputes: Disagreements over costs or reasonable expenses are more common with cost-plus contracts, sometimes leading to friction between homeowners and contractors.
How to Decide Which Type of Contract is Best for You
If you’re having some trouble deciding which is best after reading about the advantages and disadvantages of cost-plus and fixed-price contracts, here are a few things to consider.
Why Should Someone Choose a Cost-Plus General Contractor?
The cost-plus model is generally best suited for homeowners who have extensive experience with construction management or who feel comfortable handling unpredictable costs. Here are situations where the cost-plus model can work well:
- You’ve managed remodels before and are comfortable accepting the risk of increased costs.
For experienced homeowners, the cost-plus model can be a flexible and effective choice. However, it does come with a higher risk of cost overruns.
Real estate investor Moses Kagan often uses cost-plus contractors for apartment renovations. His team handles design and material sourcing, allowing them to directly control costs.
Due to his experience in working with cost-plus contractors, this model works especially well for Kagan. However, for the average homeowner, it’s important to carefully consider if you have the knowledge and experience to manage construction costs yourself throughout the process. - You want to hire labor for a smaller project and treat the contractor like an employee.
For smaller projects where the main need is labor rather than skill or design, a cost-plus contractor can be ideal. Homeowners who want to handle materials and oversee labor themselves might find cost-plus contracts effective, as they allow the homeowner to treat the contractor more as an employee than a full-service provider.
Why Should You Choose a Fixed-Price Contract?
For most homeowners, the fixed-price contract offers a strong balance between design flexibility and predictable construction costs. Here are a few reasons why this model might be the best fit for your remodel:
- You Want to Stay Within a Set Budget
Fixed-price contracts provide financial security by locking in a total project cost before construction begins. This ensures you know exactly how much your remodel will cost, significantly reducing the risk of unexpected expenses. - You Prefer Minimal Involvement During Construction
If you’d rather not track expenses or approve invoices throughout the project, a fixed-price contract lets you leave those responsibilities to the contractor, freeing you to focus on other priorities. - You Value Comprehensive Planning
A fixed-price contract ensures that your remodel is thoroughly planned out before construction starts. This approach minimizes the chance of mid-project surprises and ensures that the final result aligns closely with your vision. - You Appreciate Project Stability
Fixed-price contracts promote stability by ensuring that the timeline and budget are clear from the outset. This can help reduce stress and keep the project on track, even when unexpected issues arise.
Why Lamont Bros. Recommends Fixed-Price Contracts
At Lamont Bros., we’re a firm believer in transparency — but that doesn’t necessarily mean being unbiased.
In our experience, fixed-price contracts offer far more security and satisfaction for homeowners during a home remodel. That’s why we only use this type of contract for our projects.
The reason for this is simple — fixed-price contracts create an agreement where both parties fully understand expectations and risks. This means the project has a clearly defined design and price, giving it a greater chance of success.
Conversely, cost-plus contracts pose a much greater risk to the homeowner’s budget and the contractor’s reputation. If something goes wrong during the project and it incurs extra costs, the homeowner is unhappy because of the increased price, and the contractor has to deal with the potential fallout of a soured client relationship. On paper, cost-plus contracts are 3 times more likely to result in a lawsuit than fixed-price contracts. In our minds, these numbers speak for themselves. For the average homeowner, fixed-price contracts are much more predictable and result in more positive outcomes for the homeowner and the contractor.
Want to learn more about the Design-Build Process?
By now, you should be able to identify the difference between a cost-plus and fixed-price contract and should have a pretty good idea of which one is best for your upcoming remodel. Now, take the next step in your research. To learn more about how to find a great contractor for your upcoming project, download our free guide, 3 Steps to Choosing your Contractor. In it, you’ll find expert advice from remodeling industry experts on how to identify your needs and find the best contractor who will meet them.
Want to speak directly with a designer about your dreams for your upcoming remodel? Click the button below to schedule a free design consultation with a member of our team. We’ll help you turn your current home into your dream home.