Lump Sum Contract v. Cost Plus Contract

The big day has arrived- you researched and found the right custom home builder, hired an architect to draw up your house plans, and are now ready to sign the contract. Traditionally, this contract is structured in one of two ways: a Lump Sum Contract or a Cost Plus Contract. My hope is to explain these two types of contracts in a way that makes it clear which path is right for you and your custom home goals. 

Path 1: Lump Sum Contract

In this contract, you and your builder have agreed upon one fixed price for all of the work shown in the plans and specifications.  Once the contract is signed and construction begins, that price will never change.  If the home builder ends up exceeding the budget on – let’s say the drywall – they will have to cover the difference out of their own pocket.  You as the client will never have to worry about these overages.

Path 2: Cost Plus Contract

In this contract, you and your builder have agreed on a “starting point” price.  Once the contract is signed and construction begins, you will be on the hook for all budget overages.  Some people call this an “open book” contract.  The builder will be legally responsible for showing you all their numbers, so you will know exactly what their expenses and profit are.

Which Path is Better?

I have used both contract types with clients, and both have their pros and cons.  In general, I would say that a Lump Sum Contract produces a smoother, more seamless construction experience for the client.  As previously mentioned, in a Lump Sum Contract, the client does not have to stress about the costs of their project once the contract is signed.  There could be an instance, for example, where the window package comes in $12K over the builder’s budget.  The client can visit the jobsite, admire the beautiful windows and never have to deal with the mental burden that these windows could have caused. In this crazy time with so much price fluctuation, the client can just enjoy the construction experience without the headache.

So why would you ever sign a Cost Plus Contract?  Typically, you will get a better deal from the builder since they are sharing all numbers with you and are not liable for unexpected costs.  Depending on the magnitude of the project, this could save you $20K to $50K.  So yes, that could be some serious savings!  Just be cautious- if you sign a Cost Plus Contract, are you prepared to spend $20K to $50K out of pocket for hiccups and surprises that come up along the way? Do you want to carry the mental burden for every expense throughout the entire construction process? 

As you can see, there is no objectively right or wrong contract path to choose; however, there is likely a better and worse option for you depending on personality and goals. Hopefully you now possess the insight to make the best possible decision!