Fixed price, cost-plus, and everything in between

Two bids for the same project can be different animals. One is a promise — “this scope, this price.” The other is an estimate — “we’ll bill you what it costs, plus our fee.” The number on the page might even be the same. What differs is who pays when reality comes in over the estimate.

Fixed price (lump sum)

The contractor commits to a total price for the scope defined in the plans. If their labor or materials cost more than they figured, that’s their problem; if they build efficiently, the savings are their profit. You get budget certainty and simple accounting.

The trade-offs: the price includes a cushion for the contractor’s risk, you don’t see the underlying costs, and a GC who bid too low has an incentive to cut corners or fight over what counts as a change. Fixed price also only works when the scope is truly defined — vague plans plus a fixed price is a change-order machine. Watch the allowances, too: an allowance is a placeholder budget inside the bid for items you haven’t picked yet (“$5,000 for tile,” “$12,000 for cabinets”), and you pay the difference when the real selection costs more. A bid stuffed with unrealistically small allowances looks cheap on paper but is a fixed price in name only. Spot-check them yourself before signing: price the tile, fixtures, or cabinets you actually want and compare against the allowance — an hour of checking tells you whether the bid is honest.

Cost-plus

You pay the actual cost of labor, materials, and subs, plus the contractor’s fee — either a percentage (typically 10–20) or a flat amount. Every dollar is visible, there’s no risk cushion baked in, and it suits projects where the scope genuinely can’t be pinned down up front, like remodels of older homes.

The trade-off is that the risk is all yours: there is no ceiling unless you negotiate one, and a percentage fee means the contractor earns more when the project costs more. Cost-plus only works with real transparency — receipt and timesheet audit rights in writing, and a fee structure you understand. A flat fee removes the incentive problem; a percentage fee demands more vigilance. A handful of contract terms can rein these risks in considerably — see our guide to protective contract terms.

The hybrids

Cost-plus with a guaranteed maximum price (GMP) caps your exposure: you pay actual cost plus fee, but never more than the cap, and savings below the cap are shared or returned. It’s the most owner-friendly structure — and the one contractors agree to least readily on small residential work.

Time and materials — hourly labor plus materials at cost — is fine for small repairs and genuinely unknowable work, but on a whole project it’s cost-plus with even less structure. If a GC proposes T&M for a major job, ask why the scope can’t be defined well enough to price.

Not every GC offers every structure

Many builders — especially custom-home builders — work cost-plus only, and no amount of negotiating will get you a lump sum from them. Others bid fixed price exclusively. Ask at the first conversation, before anyone spends time on a bid: “Do you work fixed price, cost-plus, or both?” If you want the budget certainty of a fixed price, put your effort into finding contractors who offer fixed-price agreements — not into converting one who doesn’t.