WHAT TYPE OF CONSTRUCTION CONTRACT IS BEST FOR YOU?
A fixed-price contract is one where the plans, specifications, and all of the materials and finishes are mostly determined (fixed) before you start construction on your new home. A cost-plus contract takes all the costs of the home and adds a percentage of costs for the builder’s management fee.
Either a fixed-price or a cost-plus contract can be used successfully in building a custom home. It depends on what you’re most comfortable with.
Fixed-price Contracts
The advantage of a fixed-price contract is that the price you pay for your home will be mostly predetermined (fixed) whether or not the price of material and labour goes up or down. The builder assumes responsibility for risks associated with the costing of your new home. The downside is that you may pay a bit more for your builder taking on these risks. Allowances for construction activities that are based on owner material selections will be set out in the contract. Some items such as excavation and groundworks are treated as an allowance due to unpredictability of site conditions. Changes to the plans, specifications and selections will result in cost change orders.
This type of contract works well on homes with completed specifications and a clear vision of the scope of work and the client’s expectations. If your home is architecturally heavy and specifications are still mostly undetermined, a cost-plus contract may be the best option for you.
Cost-Plus Contracts
A cost-plus contract differs from a fixed-price contract in that it takes the actual cost of building the home and adds a fee for the builder’s overhead and management. This fee is a percentage charged on the total costs. Of course, neither you nor your builder will know the exact building costs until the final accounting is completed shortly after closing.
A cost-plus contract can be advantageous when building larger custom homes where finish levels and other items may evolve during the building process. The homeowner’s receive monthly invoices detailing the costs involved with the project to date and an updated construction budget.
