A cost-plus contract differs from a fixed-price contract in that it takes the actual cost of building the home and adds a fee for the builder’s overhead and management. This fee can be either a lump sum (flat fee) or a percentage of total costs. Of course, neither you nor your builder will know the exact bottom line for the building costs until the final accounting is completed shortly after closing. A good builder will give you an accurate cost estimate, but it’s exactly that, an estimate, until the final accounting. With a cost-plus contract, you’ll pay the actual costs for all labor and material, plus the builder’s fee.
A cost-plus contract can be advantageous when building larger, custom homes with finish levels and other things changing during the process. With the cost-plus basis, the homeowners know their actual costs on an ongoing basis. They can then determine where they will appropriate their funds early in the construction process and receive a full accounting disclosure of all costs. If they elect to pull out a magnifying glass to search for scratches in all the panes of glass, they can choose to have those panes of glass replaced at their cost.
Usually, doing business on a cost-plus basis keeps the magnifying glass in the drawer. It doesn’t mean the builder builds with less care or quality; it just puts the homeowner and the builder on the same team. A cost-plus contract provides the synergy of identifying problems and determining win/win solutions that are in the best interests of the homeowner.
If you trust that your builder is competent and is working on your behalf, and if you are comfortable not knowing your exact total costs until the end of the project, then a cost-plus contract may be best for you. Your final cost will depend on the choices you make. Your builder will charge a smaller management fee on a cost-plus basis because he assumes less risk.
Both fixed-price and cost-plus contracts are successfully used in building new custom homes. You can decide which works best for you.
The bottom line
Choose a cost-plus contract if you are comfortable knowing your end cost will be determined by the choices you make, and you know you have a trustworthy builder.