Introduction
When embarking on your luxury homebuilding journey, one of the most critical decisions you’ll make is choosing the right type of construction contract.
The two primary options (Cost-Plus and Fixed-Price) offer their own distinct advantages, and understanding each of them will help you determine which approach aligns best with your needs.
This article opens with a basic overview of each contract type. Then, it explores how each impacts cost predictability, schedule efficiency, and risk distribution by breaking down the key differences between the two. Finally, it concludes by explaining why Whitmore Custom Homes has chosen to specialize in Fixed-Price contracts.
Basic Overview: Cost-Plus vs. Fixed-Price Contract
Cost-Plus: With a Cost-Plus contract, your builder provides you with an estimate after which you pay for the incurred cost of labor and materials as construction proceeds (plus your builder’s markup). This traditional model is used more commonly within residential construction because it allows projects to begin quickly—even if all selections and final pricing are not yet determined. It also offers flexibility, meaning you can continue to make major adjustments to your design, materials, and scope throughout the construction process. | Fixed-Price: With a Fixed-Price contract, your builder provides you with an exact contract value, allowing you to lock in 70% or more of the project’s total cost before construction begins. This alternative model is used less commonly within residential construction because the builder assumes a greater amount of risk (which we will cover in more detail below). It also requires a greater amount of planning and collaboration upfront. |
Cost Predicability: Variable vs. Defined Pricing
Cost-Plus: As mentioned in the basic overview, with a Cost-Plus contract your project budget is an estimate, based either on bids obtained for your project or on past projects completed by your builder. While this allows construction to begin sooner, it also means your actual costs are incurred during construction. In other words, if material prices rise or labor costs fluctuate you are responsible for covering all additional expenses, along with the builder’s markup. | Fixed-Price: As mentioned in the basic overview, with a Fixed-Price contract your project budget is an exact contract value, based on bids obtained from multiple trusted subcontractors within each trade for your specific project. While this requires a greater amount of planning prior to breaking ground, it also means your actual costs are known prior to construction. In other words, if material prices rise or labor costs fluctuate, you are not responsible for covering all additional expenses in large part due to the builder issuing purchase orders up to 18 months in advance to lock in agreed-upon prices. |
Schedule Efficiency: Fluid vs. Concrete Timeline
Cost-Plus: In a Cost-Plus model, your construction timeline may vary greatly, as major decisions regarding project design and scope continue to be made throughout the construction process. While this allows for flexibility, it also allows for major delays—whether due to material selection changes, subcontractor availability, or unexpected project complications. Additionally, Cost-Plus contracts typically include a monthly management fee which continues as long as the project is active. This means that as the project runs behind schedule, your builder will continue to charge you with overhead fees. This may incentivize cost-plus builders to maintain billable hours for your project long after the estimated occupancy date. | Fixed-Price: In a Fixed-Price model, your construction timeline is largely set in stone, as major decisions regarding project design and scope have already been made prior to the construction process. In other words, your builder’s accurate awareness of your vision allows them to create a structured construction schedule thus minimizing delays and ensuring that all project milestones and deadlines are established well before work begins. Additionally, Fixed-Price contracts typically include a predetermined management fee which only covers the cost of overhead included in the pre-approved construction timeline. This means that if the project runs behind schedule, your builder will no longer charge you with overhead fees. This incentivizes fixed-price builders to land as close to the estimated occupancy date as possible. |
Risk Distribution: Homeowner vs. Builder Responsibility
Cost-Plus: With a Cost-Plus contract, you as the client are solely responsible for the risks associated with the project, considering you are not protected from inflation, scope creep, and unexpected cost fluctuations. This is due in large part to the unknown actual cost of material and labor and the unpredictable schedule. | Fixed-Price: With a Fixed-Price contract, your builder partners with you to balance responsibility for the risks associated with the project, by doing all that we can to protect you from inflation, scope creep, and unexpected cost fluctuation. This is due in large part to the known actual cost of material and labor and the predicable schedule. |
Why Whitmore Custom Homes Chooses Fixed-Price Contracts
While both types of construction contracts have their place within the luxury homebuilding market, at Whitmore Custom Homes we have chosen to specialize in Fixed-Price contracts because we believe that Fixed-Price contracts provide the best experience for our clients.
After all, only Fixed-Price contracts could allow us to:
Lock costs upfront, with the help of detailed bid specifications based on an extensive understanding of your project and its scope
Structure detailed project schedules, with the help of advanced project management software and a talented team of professionals
Ensure a balanced risk distribution, with the help of our trusted, collaborative design-build process
If you’re considering a luxury homebuilding or renovation project and want to learn more about how our Fixed-Price approach can benefit you, we would love to be a resource for you. Contact us today to start the conversation!
Comments