Choosing the Right Contract Type Could Save You Thousands on Your Next Home Construction Project

When planning a major home construction or remodeling project, one of the most critical decisions you’ll make isn’t about materials or design—it’s about which pricing model to choose. Two common types of contracts are fixed-price, for which the project’s total cost is predetermined, and cost-plus, for which expenses are estimated but the final price is determined at the project’s end. Understanding these contract structures can mean the difference between staying within budget and facing unexpected costs that could derail your project.

What Is a Cost-Plus Contract?

If you’re using cost-plus pricing in your remodeling business, you are charging clients a percentage markup on top of each dollar spent on labor, materials, and trade partners on a construction project. A cost-plus contract is an agreement in which the project owner pays the contractor for all actual project costs plus an additional fee. A construction project’s direct expenses include raw materials, labor (including specialized subcontractors) and equipment bought or rented for the work to be done. Indirect costs include overhead expenses related to business operations, ranging from office rent, fees for maintaining insurance, utilities, transportation and communication systems, to name a few.

The profit part of a cost-plus contract — the “plus” — can be calculated a few different ways. In a cost-plus fixed-fee contract, the contractor is paid a set, negotiated fee regardless of the final cost of the project. Meanwhile, contracts that base a contractor’s profit on a set percentage of the project’s total cost are called cost-plus fixed-percentage contracts.

Understanding Fixed-Price Contracts

In a fixed-price contract, the total cost is predetermined. The fixed cost model gives a price upfront, taking into account an estimated cost of material and labor before the job begins. Your cost remains fixed unless you choose to add something or hidden damage is uncovered. In such cases, a Change Order (CO) is initiated, but you maintain complete control over your budget by approving or declining these changes before additional costs are incurred.

For homeowners in the Bay Area seeking reliable construction services, working with an experienced general contractor meinert can help ensure your project stays on track regardless of which contract type you choose.

Advantages of Cost-Plus Contracts

Cost Plus contracts can be beneficial in today’s marketplace as it’s increasingly common that projects are more customized, and they often start without most of the detailed plans fleshed out. In a fixed-cost world, that’s a huge risk for home builders because there are so many unknowns that they can’t assign hard costs to, which can translate into a loss of profit.

With a cost-plus contract, client conversations about unexpected costs that present themselves after demolition are easier to navigate because those costs are transparent. This can be a bit more contentious in fixed-cost because costs aren’t visible, which can fracture trust with the homeowner. It might benefit the homeowner if the project comes in under budget. If the project does end up costing less than estimated in a cost-plus contract, you will pay that cost, possibly spending less than you anticipated.

Benefits of Fixed-Price Contracts

Homeowners know the price going into a project and will pay that price, regardless of costs that may arise due to errors on the side of the contractor or increased material costs. In a fixed-price contract agreement, the contractor is taking on risk, is motivated to keep changes at a minimum, come up with cost-saving solutions if issues arise, and find cost-effective materials if substitutions are needed.

Though there are pros and cons to both pricing models, a Fixed-Price contract is the safer option for a client wanting to maintain control over their budget. Your cost is predetermined. No surprise fees or increases, unless they’re initiated by you, the homeowner, through change orders.

Potential Drawbacks to Consider

Cost-plus contracts aren’t without risks. As we’ve mentioned, you’d be responsible for covering costs that weren’t predicted in the original estimate, even if they go beyond your budget. When contractors use a cost-plus contract, they’re able to propose a lower bid, knowing that every expense beyond the bid will have to be covered by the homeowner regardless–while making their proposed bid very attractive to a homeowner.

Fixed-price contracts also have limitations. The fixed price makes changes to the project scope or design difficult. Adding new features or modifying the design usually requires renegotiating the contract, which can delay the project and increase costs. Fixed price bids are typically higher than cost-plus because the contractor is taking on more risk, perhaps more experienced, has more industry knowledge about material and labor costs, or prefers the simple nature of this kind of contract.

Which Contract Type Is Right for Your Project?

In short, smaller, straightforward projects lend themselves well to a fixed-price contract, which establishes the full price from the outset. But for bigger projects where the scope of work is hard to fully know ahead of time, such as the construction of a new apartment complex, a cost-plus contract is often the better choice. Larger, longer-term projects for which the scope is difficult to determine at the outset are more the domain of a cost-plus contract, which estimates costs for a project’s various needs but leaves open a final price until the end.

If the goal is tight budget control and predictability, a fixed price contract is ideal. Whether a homeowner values flexibility and is ready to make many changes but wants transparency into every dollar spent during the project, a cost-plus will fit.

Working with the Right Contractor Makes All the Difference

Regardless of which contract type you choose, success depends largely on working with a reputable, experienced contractor. DoPro Construction, based in Walnut Creek, brings over 40 years of combined experience to Bay Area construction projects. DoPro Construction is a leading roofing company based in Walnut Creek, CA, specializing in roof repair, replacement, and home remodeling services. With a commitment to quality craftsmanship and customer satisfaction, they serve clients throughout the SF Bay area.

What sets DoPro apart is their transparency and customer protection. They offer a “Never Get Burnt Guarantee” with no upfront payments required, and they hold both general contractor and roofing licenses—a relatively rare combination that allows them to handle comprehensive projects without subcontracting major components.

Making an Informed Decision

Before entering into either type of contract, contractors and project owners alike should understand their pros and cons and why one may be better-suited than the other for a particular project. But whichever contract type is selected, all parties should understand their pros and cons and be prepared to carefully monitor and track expenses.

Consider your project’s complexity, your risk tolerance, and how much flexibility you need during construction. For well-defined projects with clear scope, fixed-price contracts offer budget certainty. For complex renovations or projects with many unknowns, cost-plus contracts provide flexibility but require more active oversight.

Remember that to guard against expenses getting out of hand, a project owner may require the cost-plus contract to include a cap on the final price. Similarly, ensure that fixed-price contracts include detailed specifications to avoid disputes over what’s included.

The key to success with either contract type is choosing a contractor who communicates clearly, provides detailed documentation, and has a proven track record of completing projects on time and within budget. Take time to research contractors thoroughly, verify their licensing and insurance, and get multiple detailed bids before making your decision.