Types of Construction Contracts for Building a New Custom Home

When embarking on your custom home buying journey, one of the key decisions you’ll have to make is choosing the right type of contract. Two of the most common types of contracts are cost plus and fixed price contracts. To understand the difference and make an informed decision, keep reading.

Fixed Price Contracts
A fixed price contract occurs when the builder and the homeowner agree on a fixed price for the project. The price does not change, regardless of any unforeseen expenses or changes to the project. This type of contract is ideal for home buyers who have a fixed budget and want to avoid unexpected costs.

Advantages of a Fixed Price Contract:
• Certainty and stability: The homeowner understands their financial obligation and the builder knows exactly how much they will be paid. This makes budgeting and planning much easier for both parties.

Considerations:
• Risk for the builder: If there are any unforeseen expenses or changes to the project, the builder may end up losing money. This can lead to disputes and delays in the project.
• Risk for the homeowner: The homeowner needs to feel comfortable up front that they are paying a fair price for the home. The homeowner should consider contingencies in the contract such as additional land prep or allowances.

Cost Plus Contracts
A contract is considered a cost plus contract when the homeowner is responsible for paying for all the costs associated with the project, as well as an additional fee or percentage of the total cost as profit for the builder. This type of contract is preferred by home buyers who want more control over the project and are willing to take on the risks associated with any unforeseen expenses.

Advantages of a Cost Plus Contract:
• More flexibility: The builder can charge for any additional expenses or changes to the project. This provides more flexibility for the builder and reduces the risk of losing money on the project. Additionally, the homeowner has more control over the project, as they can make changes and additions without worrying about exceeding their budget.

Considerations:
• Risk for the builder: It might not seem as obvious at first, but there is inherent risk to the builder in a cost plus scenario. There will inevitably be quality of workmanship concerns along the way. Who is to pay for those “redos” and is there markup included when that event happens?
• Risk for the homeowner: Without a fixed price, the total cost of the project can quickly change, leading to an unexpected financial burden. There is also little incentive for the builder to negotiate lower pricing with the subcontractors.

Ultimately, the choice between a fixed price contract and a cost plus contract depends on the specific needs and preferences of the home buyer. If you have a fixed budget and want to avoid any unexpected costs, a fixed price contract may be the best option for you. However, if you want more control over the project and are willing to take on the risks associated with any unforeseen expenses, a cost plus contract may be your preference.

Regardless of what type of contract you choose, be sure to work with a trusted custom home builder. Building a custom home is a long-term project, and it’s important to find a builder that you trust and can communicate with effectively.

To begin your custom homebuilding journey in the Panama City area, call 850-265-6047 or visit our model home.