What Does Your Construction Contract Actually Fix?

Picture two proposals for the same custom home.

The first reads "cost plus, with a fixed fee of $150,000." The second reads "fixed price of $1,150,000."

Both use the word fixed. Both sound like protection from surprises. But if the house costs $100,000 more to build than anyone expected, one of these owners pays for it, and the other, on paper, does not.

The difference is what each contract fixes. Every agreement between an owner and a contractor locks some number in place: the total, the contractor's fee, a markup, an hourly rate, or a ceiling. Everything it doesn't lock is free to move, and the contract decides who pays when it does.

Fixed price fixes the total

A fixed price contract sets one number for a defined scope of work, and the owner pays that number. The contractor's costs, overhead, and profit all live inside it, usually out of the owner's view.

Lump sum means the same thing. So does stipulated sum, the term the AIA uses in its A101 owner and contractor agreement.

What moves is the contractor's margin. If the work costs less, the contractor keeps more. If it costs more, the contractor is supposed to earn less.

The scope can move too, and that is where fixed prices tend to leak. Anything outside the defined scope becomes a change order with its own price. We covered how that plays out in Fixed Price vs. Cost Plus: Who Gets the Savings?

Cost plus fixes how the contractor gets paid

Cost plus lets the cost of the work move and fixes the contractor's compensation on top of it.

The owner reimburses what the work really costs: subcontractors, materials, labor, permits, and equipment. The owner sees the bids, invoices, and receipts, keeps the savings when costs come in low, and pays the difference when they come in high. You'll also hear this called cost reimbursable, open book, or, in AIA documents A102 and A103, "cost of the work plus a fee."

The "plus" is the contractor's fee, and it comes in two forms.

Fixed fee. A set dollar amount for a defined scope. If costs rise, the fee stays where it is. If the owner adds scope, the fee is usually adjusted by change order.

Percentage fee. A markup on cost, such as 15%. The percentage is fixed, so the fee grows as costs grow.

Fixed fee is the term most often mistaken for fixed price. In a fixed fee contract, only the contractor's pay is locked. The owner still pays whatever the work costs.

Every cost plus contract also needs a clear line between reimbursable costs and what the fee already covers. On-site supervision, dumpsters, temporary toilets, and builder's risk insurance can fall on either side.

Back to the two proposals

Say the estimated cost of work was $1,000,000 and the real cost came in at $1,100,000. Here are both proposals, plus a percentage fee version for comparison:

Contract	Fixed number	Contractor earns	Owner pays
Cost plus, $150,000 fixed fee	The fee	$150,000	$1,250,000
Cost plus, 15% fee	The markup	$165,000	$1,265,000
Fixed price of $1,150,000	The total	$50,000	$1,150,000

The fixed fee owner paid for the overrun, but the contractor earned nothing extra from it. The percentage fee owner paid for the overrun and $15,000 more in fee. The fixed price owner paid nothing extra, as long as the contractor agrees the overrun was inside the original scope.

Time and materials fixes the hourly rate

Time and materials, or T&M, bills labor by the hour at an agreed rate and materials at cost, usually with a markup. The rates and the markup are fixed. The hours and the materials are not.

The hourly rate is a billing rate, well above a wage. It covers the worker's pay, payroll taxes, insurance, tools, the truck, the office, and the contractor's profit. That is the main structural difference from cost plus, where labor is usually billed at cost and profit sits in a separate fee.

T&M usually comes without a defined scope or an estimated total. That suits work nobody can price before it starts: repairs, small remodels, or opening a wall to see what's behind it.

GMP and not to exceed fix a ceiling

A guaranteed maximum price, or GMP, adds a ceiling to cost plus. Below the ceiling, the owner pays actual cost plus fee, and savings go to the owner or get shared with the contractor. Above it, the contractor pays for costs within the guaranteed scope.

Not to exceed applies the same idea to T&M work or a single change order. The contractor bills as the work goes and has to stop and ask before passing the set amount.

A ceiling shares the weakness of a fixed price. It only holds for the scope both parties agree it covers.

A fixed price with moving parts

Few owner and contractor agreements use one pricing method from start to finish. The most common mix in residential construction is a fixed price for the base contract, with everything outside it priced another way.

Go back to the fixed price proposal. Read past the first page and the contract says three more things:

• Change orders are priced at cost plus 20%.
• Lighting fixtures carry a $40,000 allowance. Selections over the allowance are billed at cost plus 20%.
• Rock excavation is excluded. If the crew hits rock, removal is billed T&M.

Then the house gets built:

What happened	How it's priced	Owner pays
Base contract	Fixed price	$1,150,000
Framing labor runs $20,000 over	Inside the fixed price	$0
Owner upgrades windows, $30,000 cost	Change order, cost plus 20%	$36,000
Fixtures come in $12,000 over	Allowance overage, cost plus 20%	$14,400
Excavator hits rock	Excluded, billed T&M	$8,500
Total		$1,208,900

The fixed price did its job. The contractor absorbed the framing overrun, and the owner never saw it. The other $58,900 came through the parts of the contract that were never fixed.

Notice what those parts are. A change order at cost plus 20% is a percentage fee in miniature: the bigger the change, the more the contractor earns. An allowance is a small cost plus contract inside the fixed price. An exclusion billed T&M is open-ended by design.

None of that is unfair. But few owners picture it when they sign a "fixed price."

The same mixing happens in other directions:

• Cost plus now, fixed price later. The contractor works cost plus through design and early site work, then converts to a fixed price or GMP once the drawings and selections are complete.
• Fixed price with T&M for the unknowns. Common in remodels. The new kitchen is fixed price, and anything found behind the walls is T&M.
• Cost plus with a fixed fee that adjusts. The fee is fixed for the original scope and grows by an agreed amount or percentage when the owner adds work.

How to read a proposal

When a proposal lands on the table, look past the label and find three things:

1. The fixed number. The total, the fee, a markup, a rate, or a ceiling.
2. What moves. Cost, scope, hours, or the contractor's margin.
3. How everything outside it is priced. Change orders, allowances, and exclusions.

Term	What's fixed	What moves	Who pays when cost rises
Fixed price, lump sum, stipulated sum	The total	Contractor's margin, scope	Contractor, unless it's a change
Cost plus, fixed fee	The fee	Cost of the work	Owner
Cost plus, percentage fee	The markup	Cost of the work and fee	Owner
Time and materials	Hourly rates and markup	Hours and materials	Owner
GMP, not to exceed	A ceiling	Cost below the ceiling	Owner below it, contractor above

Two proposals with the same bottom line can carry very different risk. The fixed number tells you where it sits, and the fine print tells you how much of the contract it covers.