Build on your lot building contract: cost-plus or fixed price?

    When you begin your hunt for a home builder, you're going to be faced with an important choice. Will you choose a cost-plus construction contract, or a fixed price contract?

    If you decide to go with a cost-plus building contract, you might wind up paying far more than you could have imagined for your dream home. Let's take a look at the cost-plus contract, why it isn't ideal, and why fixed pricing is the best alternative.

    What is a cost-plus contract?

    In a cost plus contract, you're paying the builder the cost of constructing your house plus a fee. The fee is a percentage of the overall cost to build. This type of contract can be enticing because it gives you the impression that you're getting freedom and authority. Because the price isn't fixed, a cost-plus builder is also more likely to say yes to a design even if the builder knows that the project will go over the budget.

    Why isn't a cost-plus contract ideal?

    Simply put, without a fixed price there's nothing to hold the builder accountable to your budget.

    You told told the builder that you only want to spend $250,000 on the house. But that doesn't mean that he has to stay within that price. In addition, there's no incentive for a cost-plus builder to stay within budget. In fact, there's a built-in incentive for the builder to go over the budget. After all, the more that the project goes over budget, the more money the builder makes.

    So why make sure to reduce waste during construction? Why not accept a house plan that is more expensive to build than a customer thinks? A cost-plus building contract leaves you vulnerable to blowing up your budget.

    Fixed price is the ideal home construction contract

    In a fixed price contract, that budget is gospel truth.

    That budget constraint ensures that your builder is held accountable. When you choose a design and present it to your builder, a fixed price building contract will compromise to get some of the features that you like without going over that budget.

    As opposed to having no incentive to be efficient, the builder who builds on your lot under a fixed-price building contract must stay within budget. Otherwise, the builder eats the extra cost.

    Who do you want to pay for inefficiency, you or the builder?

    That should be a pretty simple question to answer. Nobody wants to be in a situation in which they could be surprised with an extra expense. That's why we recommend a fixed price building contract no matter what builder you choose.

    2 minute read