Fixed-Price vs. Cost-Plus: Choosing a Builder Contract

A fixed-price (lump-sum) contract sets one total number for the defined scope of work before construction starts. The builder prices in their own estimate of materials, labour, and a contingency for risk, then commits to delivering that scope for that price. If their costs run higher than expected, they absorb the difference. If costs come in lower, they keep the difference.

The trade-off is that the design has to be essentially finished before signing, since the builder is pricing exactly what is in the drawings and specifications. Anything not in those documents — a design change, an owner-requested upgrade, or a site condition nobody could see before excavation — becomes a change order priced separately, on top of the original fixed number.

A cost-plus contract has the owner pay the builder's actual, documented costs, plus an agreed fee on top, most often a percentage of cost or a flat monthly management fee. The owner sees itemized invoices for materials and subcontractor work rather than one lump number, and can make design and material decisions as the project proceeds without triggering a formal change-order negotiation each time.

The trade-off is that the final total is not known at signing. If material prices rise or the scope grows during construction, the owner pays the actual result, not a pre-agreed number. This is why cost-plus contracts almost always include a not-to-exceed clause or evolve into a guaranteed maximum price structure once the design firms up.

A guaranteed maximum price (GMP) contract runs like cost-plus — the owner pays documented actual costs plus a fee — but adds a stated ceiling the total cannot exceed. If the project finishes under the ceiling, the contract typically specifies how any savings are shared between owner and builder. If costs would run over the ceiling, the builder generally absorbs the overage, the same way they would under a fixed-price contract.

For a multiplex owner-builder, GMP is often the practical compromise: it gives a lender the fixed total needed to underwrite a construction mortgage, while still letting the owner see actual cost detail and negotiate savings the way cost-plus allows.

A construction mortgage draws funds in stages against a defined total project cost. Lenders underwriting that draw schedule need a number to lend against, which is why fixed-price and GMP contracts are generally easier to finance than open-ended cost-plus agreements. Confirm with your lender which contract structure their construction mortgage product requires before signing with a builder.

This decision sits alongside the financing instrument itself — see the capital stack breakdown for how construction debt, equity, and take-out financing fit together, and the credit union financing guide for one BC-specific construction mortgage product's draw requirements.