Cost Plus vs Fixed Price Contracts

The two contracts behind every Charlotte custom home

Almost every custom home in Charlotte is built under one of two agreements: a cost plus contract, where you pay the true cost of the work plus a builder fee, or a fixed price contract, where the builder commits to a single number for a defined scope. The words look procedural on page one. They are, in practice, the single largest predictor of whether your budget holds through framing, trim, and closeout.

I have built under both. Neither is dishonest, and neither is automatically safer. What separates a calm build from a painful one is whether the contract matches the level of specification you had at signing. How a cost plus contract behaves

Under cost plus, the builder bills actual subcontractor and material invoices, then adds a fee, typically expressed as a percentage of cost. The appeal is transparency: you see every invoice. The exposure is equally plain. If the cost rises, the fee rises with it, and your ceiling moves.

Cost plus works well when scope genuinely cannot be fixed at signing - a Myers Park tear-down with unknown subgrade conditions, a waterfront lot on Lake Norman where shoreline work depends on survey results, or an estate where interior selections will be curated over the following year. It works badly when it is used to paper over incomplete drawings on an otherwise ordinary build.

Two protections matter if you sign one: A guaranteed maximum price (GMP) that caps total exposure, with a written statement of what a change to that cap requires. A fee that is fixed in dollars, not percentage, so no one profits from escalation. How a fixed price contract behaves

Fixed price puts the cost risk on the builder. You know the number. The trade-off is that the number is only as honest as the specification behind it. A fixed price built on thin drawings and generous allowances is not a fixed price - it is an invitation to change orders, and change orders price at a different moment in the market than your original bid did.

A fixed price contract is worth signing when three things are true: architectural drawings are complete and permit-ready, the specification names actual products rather than dollar allowances, and the builder has priced the work with the subcontractors who will perform it. If any of those is missing, the number is an estimate wearing a contract's clothing. Where allowances quietly move the price

Allowances are the join between the two structures, and they are where most Charlotte budgets slip. An allowance is a placeholder: a dollar figure for a category that has not been selected. Plumbing fixtures, lighting, appliances, tile, and landscape are the usual suspects.

The failure is rarely the allowance itself - it is an allowance set beneath the level of home being drawn. A $40,000 appliance package in a residence detailed for a $90,000 kitchen is a deferred overage, not a saving. Before signing either contract, ask for the allowance schedule and confirm each figure against a real quote for the products you actually want. The Peters Method answer

We resolve this before contract, not during construction. Pre-construction stewardship means the drawings, structural approach, mechanical layout, and material specification are settled while decisions are still cheap. By the time a number is issued, it is priced against a named specification, with subcontractor commitments behind it - so the agreement can be a genuine fixed scope rather than a moving target.

That is also why we limit ourselves to eight to ten residences a year. A specification that tight requires the founder in the drawings, not on a status call. What to read in the contract before you sign

Ask for these in writing, regardless of structure:

1. Scope definition - which drawing set and revision date the price is tied to. 2. Allowance schedule - every category, every figure, and what happens to overages and credits. 3. Change order process - who may authorize, how pricing is substantiated, and turnaround time. 4. Draw schedule - what completion milestone releases each payment. 5. Exclusions - site work, utility connections, hardscape, landscape, and permitting fees are the common gaps. 6. Warranty terms - duration, what is covered, and who performs the work. 7. Substitution rights - whether the builder may swap a specified product, and on whose approval.

If any answer arrives verbally, put it in the document. A contract you can read in an afternoon is worth more than a contract that requires the builder to interpret it. Frequently Asked Questions Is cost plus or fixed price cheaper for a Charlotte custom home?

Neither is reliably cheaper. Cost plus can finish lower when scope is well managed and the market is calm, because you are not paying a contingency premium. Fixed price is more predictable, and predictability itself has value on a $2M to $8M residence. The bigger cost driver is specification quality, not contract type. What is a guaranteed maximum price?

A GMP is a cap on total cost within a cost plus agreement. You still see actual invoices, but the builder absorbs cost above the cap unless you approve a scope change. It is the standard way to make cost plus livable for an owner, and it should be stated in dollars with the change conditions written out. How much should I budget for change orders?

On a fully specified fixed scope build, a five percent contingency is usually sufficient. On a renovation, a tear-down, or any build entering construction with allowances instead of named products, plan on ten to fifteen percent. The contingency is a reflection of how complete your specification is, not of the builder's discipline.