Understanding Contractor Pricing Models: Which One is Right for Your Project?
When you’re planning a custom home or major renovation, how your contractor structures their pricing is just as important as the budget itself. The pricing model sets the stage for how costs are tracked, changes are managed, and how risks are shared between you and your builder.
At Porchlight Builders, we believe homeowners should understand the pros and cons of common contractor pricing models before signing a construction contract. Here’s what you need to know.
1. Fixed-Price (Lump Sum) Contract
In a fixed-price contract, the contractor provides a single, predetermined price for completing the entire project based on a clearly defined scope of work. For homeowners, this offers the benefit of cost certainty — you know what you’re paying before construction begins.
However, that certainty relies on an extremely robust estimating and budgeting process. Be cautious of any contractor offering a fixed price without demonstrating a rigorous understanding of the scope, plans, and specifications. Without this, their price may be nothing more than a guess — putting you at risk for shortcuts, disputes, or change orders that balloon costs.
To ensure a successful fixed-price project:
The owner and builder must have a deep, mutual understanding of the exact scope of work, backed by complete plans and detailed specifications documentation.
A professional change order process should be built into the contract, so changes can be accurately priced, tracked, and incorporated into the budget.
A clear payment schedule will typically be outlined in the contract, allowing both parties to plan cash flow over the duration of the project.
When well-structured, a fixed-price contract offers predictability for both the homeowner and contractor — but only if the scope and details are fully fleshed out from the start.
2. Cost-Plus Contract
With a cost-plus contract, the homeowner agrees to pay the actual cost of labor, materials, and subcontractors — plus a markup for the contractor’s overhead and profit. This markup can range from 5% to 25% or more, depending on the builder and the complexity of the project.
While the contractor will typically provide an estimate of the total project cost, it’s important to understand that this is not a guaranteed price. The flexibility of this pricing method means that the contractor doesn’t need a fully detailed understanding of all costs before starting construction — and that can lead to the final cost far exceeding the initial estimate.
Other important considerations with cost-plus contracts:
Homeowners are responsible for any price increases on materials due to inflation, supply chain issues, or other factors that arise between the estimate and the actual purchase.
Clarify whether project supervision is part of the marked-up costs, or if it is covered separately by the contractor’s fee.
If the contractor cannot secure the best-value subcontractors, you are still responsible for the actual costs, regardless of efficiency or savings.
This method is typically best for homeowners who:
Have a flexible or open-ended budget.
Are pursuing bespoke architectural or design elements that evolve during construction.
Understand and are comfortable with the potential for cost overruns in exchange for flexibility.
There are variations on the cost-plus method, including:
Cost-Plus Fixed Fee: The contractor charges the actual project costs plus a predetermined flat fee.
Cost-Plus Percentage: The contractor charges actual costs plus a set percentage markup.
Cost-Plus with GMP (Guaranteed Maximum Price): This is a hybrid where the contractor charges actual costs plus a markup, but with a cap on the total price. However, unlike a fixed-price contract, the final cost may be lower if the actual expenses come in under the GMP — with savings sometimes shared between the homeowner and builder.
A GMP provides a price ceiling, but because it’s still cost-based, it offers more flexibility than a strict lump sum (fixed price) contract — especially when the full scope isn’t entirely locked in.
3. Time and Materials (T&M)
A time and materials contract charges the homeowner for the contractor’s actual hours worked (at an hourly rate) plus the cost of materials, often with a markup on materials.
This pricing model is:
Most commonly used by handymen or smaller contractors for repair work, minor remodels, or undefined scopes.
Highly flexible, as you pay only for time and materials used.
Riskier for large or complex projects, as it offers no clear budget ceiling and can be open-ended without strict tracking.
Because of its open nature, T&M is best suited for small projects where the scope is unclear or likely to evolve rapidly during the work.
Other Pricing Models (Briefly)
Other pricing structures exist but are less common in residential construction:
Unit Pricing: Basing costs on a per-square-foot or per-unit rate for specific tasks. This is more common in commercial work or specialized trades.
Value-Based Pricing: Charging based on the perceived value of the finished product to the homeowner rather than direct costs — typically reserved for highly bespoke or luxury projects with unique expertise.
Choosing the Right Approach
Each pricing method offers trade-offs between cost certainty, flexibility, and risk. At Porchlight Builders, we guide clients through selecting the model that best fits their goals, project type, and risk comfort — ensuring that the contract structure supports both the vision and the investment.
If you’re considering building a custom home or tackling a major renovation in the Salida or Buena Vista area, let’s have a conversation about the best approach for your project. We’ll help you understand your options and chart a clear, confident path forward.