Building a New Home: Fixed Price or Cost-Plus Contract?

Constructing a Custom Home and Shopping for a Builder?

You’re inching closer from the dream to the reality of building a custom home. You have purchased the lot and you’ve narrowed down your budget. The next hurdle, to find the right builder. This person must be someone you trust, like and is competent. Beyond that, they must also have a contract that you are willing to work with.

There are two contracts that we will focus on; fixed-priced and cost-plus agreements. Each contract can be used successfully when building a custom home and the builder’s costs will be the same regardless. However, there are different risks associated with each contract, which could affect the price you pay.

Fixed-Price Contract

With a fixed-price contract, the price you pay for your home is predetermined (fixed). It is not subjected to any adjustments unless certain provisions have been included within the agreement (i.e. change orders due to additions by the homeowner, above and beyond what was included in the original contract).

For the owner, the bonus of a fixed-price contract is that the price is known upfront. The builder will need to come up with a budget that will include the scope of work to be completed, along with all labor and materials needed for the home. This provides a homeowner with the security of the exact cost of their build.

Now, this does come at a price. There is a premium for locking in the total cost of the contract. The builder is taking on the risk of building at a set price. For example, with market fluctuations, the builder may expect to pay a certain amount for lumber at the start of the project. However, the lumber costs may rise as construction is about to break ground, in that case, the builder will need to absorb those extra costs. The opposite is true as well, the market may trend downward creating a saturated market of lumber. In this case the builder benefits.

Homeowners who choose fixed-price contracts are not comfortable risking price fluctuations. They are more confident knowing the exact cost of the build and are willing to pay a small premium to the builder for this comfort.

Ready to talk about your project? Reach out to Creekside Homes — we'll give you an honest assessment of what's involved and how we can help.