When you hire a builder, the type of contract you sign decides who carries the risk if costs change. In a fixed-price (or lump-sum) contract, the builder agrees to build the house described in the plans and specifications for a set price. In a cost-plus contract, you pay the builder's actual costs plus an agreed fee. Most custom-home contracts are one of these, or a hybrid of the two.
Neither is always better. The right choice depends on how complete your plans are, how much you want to be involved, how much you trust the builder and how much uncertainty you can live with. This guide explains how each works in practice and what to look for in the fine print.
Key takeaways
- Fixed price: the builder carries the risk of cost increases within the agreed scope; you pay for changes.
- Cost-plus: you pay actual costs plus a fee, so you carry the risk but see every invoice.
- A guaranteed maximum price (GMP) is a cost-plus contract with a ceiling, and can combine the benefits of both.
- Whatever the type, the scope, allowances, change-order terms and payment schedule matter as much as the price.
How a fixed-price contract works
In a fixed-price contract, the builder prices the whole job up front from your plans and specifications. If lumber prices rise or a subcontractor costs more than expected, that is the builder's problem, as long as the work is within the scope you agreed. If the builder comes in under budget, the savings are theirs.
Because the builder carries the risk, they build a cushion into the price. That cushion sits inside the builder's overhead and profit, which in the NAHB 2024 survey averaged 5.7% and 11.0% of the sales price.[1]
What you get: a known price, easier budgeting and simpler financing. What you give up:
- Flexibility. Every change after signing is a change order, priced by the builder.
- Visibility. You usually do not see the builder's actual costs.
- Protection from allowances. The price is only fixed for items that are fully specified. Allowances can still go over.
Fixed price works best when the plans and specifications are complete and you have made most of your selections before signing.
How a cost-plus contract works
In a cost-plus contract you pay what the house actually costs, plus a fee for the builder. The fee is usually a percentage of cost or a fixed amount. You normally see invoices for materials and subcontractors, and the builder bills you or your lender as work progresses.
What you get:
- Transparency. You see where the money goes.
- Flexibility. You can start before every detail is decided, and make changes without renegotiating a fixed price.
- Savings when things go well. If a stage comes in under the estimate, you keep the difference.
What you give up is certainty. If prices rise or the job takes longer, you pay. With a percentage fee, the builder also earns more when costs go up, which is why many owners prefer a fixed fee or a cap.
Cost-plus needs more of your time
To get the benefit of a cost-plus contract, you or someone you hire must review invoices, compare them with the budget and query anything unusual. If you do not have the time, a fixed price may serve you better.
Hybrids: guaranteed maximum price and fixed fee
Two common hybrids try to get the best of both. A cost-plus with a guaranteed maximum price (GMP) works like cost-plus, but the builder agrees the total will not exceed a ceiling for the agreed scope. If costs come in under the cap, the savings go to you or are shared. A cost-plus with a fixed fee pays the builder a set amount regardless of cost, which removes the incentive for costs to rise.
| Fixed price | Cost-plus (percentage fee) | Cost-plus with GMP | |
|---|---|---|---|
| Who carries cost risk | Builder | Owner | Mostly builder above the cap |
| Price certainty | High | Low | Medium to high |
| Visibility of costs | Low | High | High |
| Flexibility to change | Low (change orders) | High | Medium |
| Who keeps savings | Builder | Owner | Owner or shared |
| Best when | Plans fully finished | Scope still evolving | Plans mostly finished |
What the fee means in dollars
It helps to turn fee terms into dollars before you compare offers. Take a house expected to cost $400,000 to build. These are round numbers for illustration, not market rates.
- With a 15% cost-plus fee, the builder earns $60,000 if the house costs $400,000. If costs rise to $440,000, the fee rises to $66,000 and you pay $506,000 in total.
- With a fixed fee of $60,000, the builder earns the same $60,000 either way. At $440,000 of cost you pay $500,000, and the builder has no extra reward for the overrun.
- With a guaranteed maximum price of $470,000, you pay cost plus fee up to that ceiling. If the job comes in at $430,000 including the fee, you keep the $40,000 difference or share it, depending on the contract.
For comparison, overhead and profit for the builders in the NAHB 2024 survey came to about 26% of construction cost on the typical single-family home each firm built during 2024. A custom builder's fee on your job will not match that number exactly, but it shows that the fee is never small, so the way it is calculated deserves real attention.[1]
Clauses to check in any building contract
The contract type matters less than what the contract says. Read these sections closely:
- Scope of work. The contract should reference specific plans, a written specification and a list of inclusions and exclusions. Anything not listed may become an extra.
- Allowances. Amounts, what they include (product only, or installed), and how overages and credits are handled. See kitchen allowances for an example.
- Change orders. Changes must be in writing, priced and signed before work starts, with the markup stated.
- Payment schedule. Tied to completed milestones, ideally the same as your lender's draw schedule. See construction loans explained.
- Schedule and delays. Start and completion dates, what counts as an excusable delay, and any remedies.
- Price escalation. Some fixed-price contracts let the builder pass on material increases. Know if yours does.
- Lien waivers. Proof that subcontractors and suppliers have been paid before each payment.
- Insurance and warranty. Builder's risk, liability and workers' compensation coverage, and what the warranty covers after completion.
- Disputes and termination. How disagreements are resolved and how either side can end the contract.
Have a construction attorney licensed in your state review the whole contract before you sign it. Contract law and lien rules vary by state, and a review costs far less than a dispute.
Keeping a cost-plus job on budget
If you choose cost-plus, a few practices keep it under control. Ask for a detailed estimate broken down by stage before work starts, and track actual costs against it every month. NAHB's eight construction stages make a good structure for that budget, and our calculator shows the national average for each one at your house size.[1]
- Agree what counts as a reimbursable cost and what is covered by the fee, such as office staff or tools.
- Ask for competitive subcontractor bids on the big trades and the right to see them.
- Agree how discounts and rebates from suppliers are passed on to you.
- Set a threshold above which the builder must get your approval before committing money.
- Keep a contingency in your own budget, not just the builder's.
Which contract should you choose?
A simple way to decide:
- Choose fixed price if your plans and selections are finished, you want a firm number for your lender, and you do not plan to make many changes.
- Choose cost-plus with a fixed fee or GMP if parts of the design are still open, the site has unknowns such as rock or groundwater, or you want to see costs and share in savings.
- Avoid open-ended cost-plus with a percentage fee unless you trust the builder and can review every invoice.
Whichever you choose, make sure you are comparing like with like when you look at bids. Our guide to comparing builder bids shows how, and our guide to change orders explains how to stop the final cost drifting away from the contract.
Lenders may have their own preferences too. Some are more comfortable with a fixed price, because it makes the loan amount easier to underwrite, and may ask for extra reserves on a cost-plus job. Ask your lender before you settle on a contract type, so the contract and the loan fit together.
Plug your house size, land price and quotes into the free calculator. It uses the same NAHB 2024 averages as this guide.
Frequently asked questions
Is a cost-plus contract cheaper than a fixed-price contract?
It can be, because the builder does not need to price in a cushion for risk and you keep any savings. But you pay if costs rise, so the final cost is less certain.
What is a guaranteed maximum price contract?
It is a cost-plus contract with a ceiling. You pay actual costs plus the fee, but not more than the agreed maximum for the agreed scope.
Can a fixed-price contract still go over budget?
Yes. Change orders, allowance overages, excluded items and any price-escalation clause can all increase what you pay.
Should a lawyer review my building contract?
It is a good idea. Contract and lien law differ by state, and an attorney can spot unclear scope, weak change-order terms or one-sided clauses.
Sources
Figures last checked October 18, 2026. National averages are a planning guide, not a quote. See our editorial policy and data sources.
