Custom Home Contracts Explained: Fixed Price vs. Cost-Plus

What Are Custom Home Contracts?

Custom home contracts are formal agreements between a homeowner and a builder that outline the scope of work, costs, timeline, and responsibilities for constructing a custom home. The two most common types of contracts are Fixed Price and Cost-Plus, each with its pros and cons.

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Fixed Price Contracts

In a fixed price contract, the builder agrees to complete the home for a set price, regardless of any changes in actual costs during construction.

• How It Works:
  • The builder estimates the total project cost, including materials, labor, and profit margin.
  • The homeowner pays this agreed-upon amount, typically in installments tied to project milestones.
• Pros:
  1. Cost Certainty: Homeowners know the final price upfront, reducing financial surprises.
  2. Budget Control: Simplifies planning for financing.
  3. Low Risk for the Homeowner: The builder absorbs unexpected cost overruns.
• Cons:
  1. Higher Initial Price: Builders may include a buffer in their estimate to cover potential risks.
  2. Less Flexibility: Changes to the scope of work often require a change order, which can be costly.

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Cost-Plus Contracts

In a cost-plus contract, the homeowner pays the actual costs of construction plus a predetermined builder fee (fixed or percentage-based).

• How It Works:
  • The builder provides detailed invoices for all expenses, such as materials and labor.
  • The homeowner reimburses these costs and pays the builder’s fee on top.
• Pros:
  1. Transparency: Homeowners see detailed cost breakdowns.
  2. Flexibility: Easier to make design changes during construction.
  3. Potential Savings: If costs are lower than expected, the homeowner benefits.
• Cons:
  1. Uncertainty: Final costs can exceed initial estimates.
  2. Higher Risk for the Homeowner: Fluctuating material prices or delays increase the total cost.
  3. Complex Accounting: Requires detailed oversight and regular communication.

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Key Considerations When Choosing a Contract

1. Budget Confidence
   • Opt for a fixed price contract if sticking to a budget is critical.
   • Choose cost-plus if you’re comfortable with variable costs and want flexibility.
2. Project Complexity
   • Fixed price contracts work well for straightforward builds with minimal changes.
   • Cost-plus contracts are better for custom homes with evolving designs.
3. Builder Relationship
   • Cost-plus contracts require trust and collaboration between homeowner and builder.
4. Risk Tolerance
   • Fixed price contracts minimize financial risk for homeowners.
   • Cost-plus contracts shift more risk to the homeowner but allow greater control.

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Contract Terms to Look For

1. Scope of Work: Detailed description of the construction project.
2. Payment Schedule: When and how payments will be made.
3. Change Orders: Procedures and costs for modifications to the original plan.
4. Timeline and Milestones: Clear deadlines for each phase of the project.
5. Warranties: Coverage for materials and workmanship after construction.

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Common Challenges with Custom Home Contracts

• Unclear Expectations: Ambiguity in the scope of work can lead to disputes.
• Delays: Weather, labor shortages, or supply chain issues can push timelines.
• Hidden Costs: In cost-plus contracts, unexpected expenses can add up.

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FAQs About Custom Home Contracts

1. Can I switch from a cost-plus to a fixed price contract mid-project?
   • Rarely, as the contract type dictates the builder’s pricing and approach from the start.
2. What’s the typical builder fee in a cost-plus contract?
   • Usually 10-20% of the total project cost.
3. What happens if I cancel the contract?
   • Review your contract’s termination clause, which outlines penalties and fees.

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Related Topics

• What Is a Change Order and How Does It Work?
• The Complete Guide to Custom Home Financing
• Understanding Builder Warranties: What You Need to Know