Cost-Plus vs Fixed-Price Contracts
When you start talking to custom home builders, you will encounter two primary contract structures: fixed-price (sometimes called a lump-sum contract) and cost-plus. Most builders will tell you their approach is better. The honest answer is that each structure has real advantages and real risks — and understanding both is essential before you sign anything.
Morreau Construction uses cost-plus contracts exclusively. This post explains why, and what questions you should be asking regardless of which builder you choose.
What Is a Fixed-Price Contract?
In a fixed-price contract, the builder agrees to complete the project for a set dollar amount. You pay that number regardless of what the builder's actual costs turn out to be. If the builder comes in under budget, they keep the difference. If they go over, they absorb the loss — in theory.
In practice, fixed-price contracts are rarely as simple as they sound.
The Problem With Fixed-Price Contracts
Fixed-price bids are built on estimates. Those estimates are made before the project starts, often before the design is fully resolved, and always before the builder knows exactly what they will find when they open the walls or dig the foundation. To protect themselves from cost overruns, builders using fixed-price contracts do one or more of the following:
They pad the number. A builder who has been burned by underestimating will add contingency to every line item. You pay for that contingency whether the risk materializes or not. On a $600,000 home, a 10–15% contingency buffer is $60,000–$90,000 that may never be spent on your home.
They use allowances. Allowances are placeholder numbers for items not yet selected — flooring, fixtures, cabinetry, countertops. If your actual selections cost more than the allowance, you pay the difference. Allowances are where fixed-price contracts frequently stop being fixed. A builder who sets allowances at $8/sq ft for flooring in a market where quality hardwood runs $12–$18/sq ft is not giving you a fixed price. They are giving you a fixed price with a variable attached.
They use change orders aggressively. Any deviation from the original scope — a window moved, a ceiling height changed, a material substituted — becomes a change order with a markup. In a fixed-price contract, the builder controls what constitutes a change. Disputes over what was and was not included in the original scope are the most common source of conflict in residential construction.
They cut costs when they are over budget. When a fixed-price builder is running over their estimate, they have a financial incentive to find savings. Those savings often come from substituting lower-quality materials, reducing labor hours on finish work, or skipping steps that are not easily visible after the fact.
None of this means fixed-price builders are dishonest. It means the structure of the contract creates incentives that are not always aligned with your interests as the homeowner.
What Is a Cost-Plus Contract?
In a cost-plus contract, you pay the actual cost of construction — materials, labor, subcontractor invoices — plus a management fee to the general contractor. The management fee is either a fixed dollar amount or a percentage of construction costs, depending on the builder.
Morreau Construction uses a fixed management fee, set at contract signing. It does not increase if material costs rise from the contract date, if an estimate came in short, or if you choose higher-end finishes within a contracted allowance. The only time the management fee increases is if you add scope beyond the original contract — and that is documented in a written change order before work proceeds.
The Advantages of Cost-Plus
Complete transparency. Every invoice is visible. You know exactly what was paid for every material, every subcontractor, every delivery. There is no markup buried in a line item. There is no question about where your money went.
No padding. The builder has no incentive to inflate estimates because they are not absorbing the risk of cost overruns. The budget is built from real subcontractor quotes, not protective estimates.
Aligned incentives. When the builder's fee is fixed, they have no financial incentive to cut corners to protect their margin. The goal is to build the best possible home within the budget — not to find savings that protect the builder's profit.
Flexibility. If you want to upgrade a countertop selection or add a feature mid-project, the cost is transparent and documented. There is no negotiation over what the change is worth because the actual cost is visible.
The Honest Risks of Cost-Plus
Cost-plus contracts require more trust in your builder than fixed-price contracts. You are relying on the builder to manage costs actively, negotiate good subcontractor pricing, and keep the project on budget — not because their fee depends on it, but because that is their job.
This is why the preconstruction phase matters so much. A real budget built from actual subcontractor quotes before you sign a construction contract is the mechanism that makes cost-plus work. Without it, cost-plus is just an open checkbook. With it, you have a reliable baseline and a builder who is accountable to it.
You are also exposed to actual cost increases in materials and labor. If lumber prices rise 15% between the time the budget is built and the time the framing crew shows up, you pay the difference. This is a real risk. It is also a risk that exists in fixed-price contracts — it is just hidden in the padding rather than visible in the invoice.
Questions to Ask Any Builder Before Signing
Regardless of contract type, these are the questions that separate builders who are worth trusting from those who are not:
How is your management fee calculated, and can it increase? A fixed fee is more transparent than a percentage. A percentage fee creates an incentive to approve cost increases.
What is included in your allowances, and how were those numbers set? Ask for the specific dollar amounts and compare them to current market pricing for the finishes you want.
How do you handle change orders? The answer should be: in writing, with pricing, before work proceeds. Any other answer is a risk.
Can I see your subcontractor invoices? A builder who is not willing to show you what they paid their subcontractors is a builder who is marking up subcontractor costs. That is not inherently wrong, but it should be disclosed.
What does your preconstruction process look like? A builder who gives you a number without a detailed preconstruction process is giving you a number they made up. The only way to get an accurate budget for a custom home is to get real quotes from real subcontractors on your specific project.
The Bottom Line
Fixed-price contracts offer the appearance of certainty. Cost-plus contracts offer actual transparency. Neither is inherently better — the quality of the builder matters more than the contract structure. But the contract structure does shape the incentives, and incentives shape behavior.
If you are evaluating builders in Western Kentucky and want to understand how Morreau Construction's cost-plus approach works in practice, the first step is a direct conversation. Learn more about our preconstruction investment process or contact us to schedule a call with Ryan.
Morreau Construction · (270) 816-4959 · ryan@morreauconstruction.com