We have used both over the years and prefer to use the cost plus for some of the reasons below but we offer both to choose from. There are pros and cons to both of types of custom building pricing structures. Both will provide success when dealing with a skilled and honest builder. Both can spell disaster with an inexperienced or dishonest builder. The pros and cons of each are derived more from the complexity of the custom home, changes in market conditions, builder motivations, and expectations of the clients.
A fixed price contract for building a custom home involves the builder giving a guaranteed price for the complete home. The builder will set up allowances for the various selections that the customer will be making. If the customer spends more than the allowance amounts, the customer must pay the difference in a change order. Otherwise, the customer knows exactly what he or she will be paying for their custom home
Cost plus a percentage
A cost plus a percentage contract is an arrangement where the client is charged the actual costs of the house plus a percentage which is added on top of that as a builder fee.
More transparency of costs and builder fee. Decisions can be made with a overall approach. Changes are less costly. More decisions can be made during the build process. No temptation for builder to cut corners. Customer is not paying for builder to take on risk of cost overruns if there aren’t any.
Customer takes on risk of cost overruns and incorrect estimating. Final cost is unknown. Temptation for builder to underbid project to earn the business. Builder is rewarded for cost overrun’s with increase in builder fee. Builder is penalized for saving money by reduced builder fee.
Works best for
More complex Custom homes and Remodels with loosely defined scope or lesser detailed plans. Stable or deflationary environment. Customers who would like to make selections later in the process. Customers more interested in getting exactly what they want than managing to a strict budget.
None of these formats is a substitute for a qualified builder with integrity. All of these contracts can be manipulated by an unscrupulous builder. None of them can protect you from an incompetent builder. The best approach is to work with someone who has a good longstanding reputation for building quality homes built on trust and on budget and on time. It is very important to have a good personality fit because building your dream house should be a fun experience!