Fixed Price vs. Cost Plus: Which Contract Protects You?

In the world of construction contracts, there are two heavyweights: Fixed Price (Lump Sum) and Cost Plus (Time & Materials). Choosing the wrong one for your specific project type is a recipe for disaster.

Fixed Price: The "Safe" Bet?

How it works: The contractor gives you a single number. $50,000. That's it.

The Risk: If the contractor underestimated the work, he starts losing money. When contractors lose money, they stop caring. They rush. They use cheaper materials. They hide mistakes. Also, "Fixed Price" is a myth if your scope isn't perfect (see: Change Orders).

Best For: Well-defined projects with zero unknowns. A new garage. A simple bathroom update.

Cost Plus: The "Transparent" Trap?

How it works: You pay the actual cost of labor and materials, plus a fee (usually 15-20%) for the contractor's profit.

The Risk: The contractor has zero incentive to be efficient. If a carpenter takes 10 hours to do a 2-hour job, the contractor makes more money. The budget has no ceiling.

Best For: Complex renovations on old houses where you don't know what's behind the walls, or high-end custom builds where quality matters more than budget.

The Hybrid Solution

My favorite approach? Cost Plus with a GMP (Guaranteed Maximum Price). You pay costs + fee, but the contractor guarantees the total won't exceed X amount. If they come in under budget, you share the savings. It aligns incentives perfectly.