Fixed price or cost plus: how a construction contract decides who carries the risk

What a fixed price contract actually promises

Under a fixed price contract, sometimes called stipulated sum or lump sum, the builder commits to complete a defined scope of work for one number. If framing labour comes in above the estimate, the builder absorbs it. If a supplier discount lands, the builder keeps it. The homeowner's exposure is limited to changes they themselves request, and to conditions the contract explicitly carves out.

That certainty has a price, and it is visible in the contract sum. A builder pricing a fixed price contract has to cover the possibility of being wrong, so the number includes a margin for risk. On a well-documented project with few unknowns, that margin is modest. On a project with an incomplete drawing set, it grows, because the builder is pricing the gap between what the drawings show and what the site may hold.

The precondition most homeowners underestimate is documentation. A fixed price is only as firm as the scope it references. If the drawings do not specify the window package, the flooring, or the mechanical system, the contract will carry allowances instead, and an allowance is an estimate wearing the costume of a fixed number. When the real selection exceeds the allowance, the difference becomes a change order and the fixed price moves.

What a cost plus contract actually promises

Under a cost plus contract, the homeowner pays the actual cost of labour, materials, and subcontractors, plus an agreed builder's fee. That fee is set either as a percentage of cost or as a fixed management fee. Invoices from trades and suppliers are passed through, and the homeowner can see what each one charged.

The transparency is the point. On a cost plus project there is no hidden risk margin, because the builder is not carrying the risk. If a bathroom demolition reveals a rotted subfloor, the repair is billed at what it costs and the project continues. On a fixed price contract, the same discovery becomes a negotiation about whether the condition was foreseeable.

The exposure is also the point. A cost plus homeowner carries the variance, so a project that runs long or hits unexpected conditions costs more, and the contract contains no mechanism to stop that. This is why a cost plus contract without a well-run estimate, a schedule, and regular cost reporting is a poor arrangement for the homeowner. The protection in cost plus is not the contract type. It is the quality of the reporting attached to it.

Which one suits which project

The useful question is not which contract is better in the abstract. It is how many unknowns the project contains, and whether they can be resolved before pricing.

New construction on a cleared lot is the strongest case for fixed price. The drawings can be complete, the site conditions can be investigated by survey and geotechnical report before a shovel moves, and the builder can price what is drawn with confidence. Here a fixed price contract gives the homeowner real certainty at a modest risk premium.

A major renovation of an older Metro Vancouver home is the strongest case for cost plus. Nobody knows what the framing behind a 1928 plaster wall looks like until it is open. A builder asked for a fixed price on that work has two options, and both are bad for the homeowner: price the worst case, which means paying for a problem that may not exist, or price the likely case and rely on change orders when it does.

Heritage restorations sit furthest along the cost plus end of the range, for the reasons set out in the heritage chapter of this guide. Whole-home renovations where the structure is being opened generally follow. Additions fall in between, because the new portion can be drawn and priced while the connection to the existing house cannot be fully known in advance.

The hybrid most experienced builders actually use

In practice, the two contract types are the ends of a range rather than a binary choice, and a well-structured Metro Vancouver renovation contract often borrows from both.

One common structure runs the investigation and demolition phase on cost plus, then converts the remainder to a fixed price once the walls are open and the conditions are known. The homeowner pays actual cost during the phase where nobody can price honestly, and gains certainty for the long construction phase that follows. Getting there requires a builder willing to re-price mid-project and a homeowner willing to wait for the number.

Another structure holds a fixed price for the defined scope and carries named allowances for the selections not yet made, with the allowance amounts agreed in writing and reconciled against actual cost. This keeps the contract honest about which parts are firm.

What matters is that the contract states plainly which parts are fixed, which are estimated, and what happens when an estimated part comes in different. A contract that leaves that unstated will resolve it later, under pressure, in a conversation neither party enjoys.

What British Columbia requires regardless of contract type

The contract type is a commercial arrangement between the homeowner and the builder. It does not alter what provincial law requires.

Under the Homeowner Protection Act, a person must not carry on the business of a residential builder in British Columbia unless licensed under the Act. New homes built by a Licensed Residential Builder must carry third-party home warranty insurance, the coverage commonly called 2-5-10. Those obligations attach to the work, not to the paperwork used to price it.

Both contract types should also state the payment schedule, the change order process, the dispute mechanism, the schedule and any provision for delay, and the builder's licence and warranty provider. A contract missing the change order process is the one that causes the most trouble, because change orders are where the relationship between a homeowner and a builder is actually tested.

Venture Pacific works under both structures and recommends one over the other based on the project rather than on preference. On a new custom home with a complete drawing set, fixed price. On a renovation of a home built before the war, cost plus with real reporting.