Which building contract is right for you?

When planning a custom home or renovation, choosing the right building contract is one of the most important early decisions. The two main types of contracts in residential construction are Fixed-Price and Cost-Plus.

Each option has its pros and cons. Knowing the differences can help you choose what’s best for your project, budget, and how involved you want to be.

Fixed Price Contracts

A fixed-price contract means the builder gives you a set total price for the work before construction starts.

This gives homeowners more certainty with budgeting, finance approvals, and payment schedules. You know the expected cost upfront, which can offer peace of mind during the build.

With this contract, the builder takes on most of the financial risk. If labour or material costs are higher than expected, the builder covers those extra costs. Sometimes, this means builders look for alternative materials or methods to stay on budget, so it’s important to choose a builder who values quality and transparency.

If the project is overestimated, the builder keeps the extra margin. This shows why it’s important to get accurate, well-researched quotes before signing a contract.

It’s also common for fixed-price contracts to include:

• Prime Cost (PC) allowances: estimated amounts for fixtures and finishes that have not yet been selected.
• Provisional Sums (PS): estimated allowances for works where the final scope or cost is still unknown

These allowances can change during construction, so it’s smart to keep a contingency budget for any unexpected costs.

Cost Plus Contracts

A cost-plus contract is different. Instead of a set price, you pay the actual construction costs as the project goes along, plus the builder’s agreed margin and overheads.

The contract clearly lists the builder’s margin, labour rates, and admin costs from the start, so you know exactly how costs are worked out.

You can still get an estimated project cost before signing, but it’s just a guide, not a fixed amount. As materials, labour, or design choices change, the actual costs will change too.

A big advantage of a cost-plus contract is flexibility. You can see exactly where your money goes and make informed choices as the build progresses. Builders also take on less financial risk if costs go up.

Since costs are tracked as you go, cost-plus projects usually mean more frequent invoices, often every two weeks or monthly. Builders need to keep detailed records of all expenses.

Builders usually pay suppliers and trades first, then recover those costs from you. Good cash flow management is essential for builders working with cost-plus contracts.

Which Contract is Best?

There’s no single best contract. The right one depends on your project, how much design detail you have, and how involved you want to be during the build.

A fixed-price contract is a good option if you want a set budget and a clear plan before construction begins.

A cost-plus contract works well for projects with changing designs, renovations with unknowns, or if you want more flexibility and transparency.

At LRC Custom Builders, we believe clear communication, transparency, and choosing the right approach for each project lead to the best results.