Fixed Price, GMP, or Cost Plus: Where to Look in Your Builder's Bid

Most explanations of construction contracts stop at the definitions. Fixed price means one number, cost plus means you pay what it costs, GMP is somewhere in between. That's true, and it doesn't help much when the bid is sitting on your kitchen table.

What helps is knowing that each contract type moves the risk to a different place, and the risk tells you where to read. On a fixed price bid I go straight to the allowances. On a cost plus bid I barely look at the total, because the total is a guess. Here's how each one works and where I'd spend my time.

Fixed price

The builder commits to one number for a defined scope of work. If framing runs over, that's the builder's problem. You'll also see this called a lump sum or stipulated sum.

The catch is the word "defined." A fixed price only holds for what the bid actually describes. Anything not pinned down still moves, and it moves in a few predictable places.

Allowances. Every selection you haven't made yet is a placeholder number, and the fixed price is only fixed for that number. A $9,000 tile allowance in a house where you'll pick $15,000 worth of tile (illustrative numbers) is a $6,000 change you can see coming. Check each allowance against what you're actually planning to choose, and check what markup the builder adds when you go over.

Exclusions. Whatever's on the exclusions list isn't in the price, no matter how obviously it belongs to the house. Read that page carefully.

Assumptions. "Assumes no rock" or "utilities to 5 feet from foundation" are fixed prices with a door left open. They're often reasonable assumptions. Just know which ones you're relying on.

Change orders. On a fixed price job, change orders are where the number grows after signing. Look at how they're priced, what markup applies, and whether they have to be approved in writing before the work happens.

One more thing about a fixed price: the builder has priced in their own risk. You don't see their contingency or their margin, and you aren't supposed to. That's part of what you're paying for, and it's why a fixed number can come in higher than a cost estimate for the same house.

Guaranteed maximum price (GMP)

You pay the actual cost of the work plus the builder's fee, up to a ceiling. If the cost runs past the ceiling, the builder covers the difference. If it comes in under, some or all of the savings come back to you, depending on the contract. The books are usually open, so you can see the real costs.

A GMP sounds like the best of both, and it can be. But "guaranteed" carries a lot of fine print. A GMP is only as firm as the definitions behind it.

What counts as cost of the work. This is the list of what the builder can bill you at cost: subcontractors and materials, obviously, but often also site supervision, the project manager's time, general conditions, insurance, and equipment the builder owns and rents to the job. Read the list. Anything billed as cost is something you pay for, and anything left off is covered by the fee.

The contingency. Most GMPs include a builder's contingency inside the ceiling. Ask who controls it, what it can be spent on, whether you see each draw against it, and what happens to whatever's left at the end. A contingency the builder can spend on their own mistakes without telling you works differently from one that needs your sign-off.

Who keeps the savings. If the job comes in under the GMP, the contract should say how the savings split. All to you, a percentage to the builder as an incentive, or nothing said at all. It's worth knowing before the job, not after.

What moves the ceiling. Allowance overages, scope changes, and unforeseen site conditions usually raise the GMP. If enough things can raise it, the guarantee doesn't guarantee much. Make sure you understand what adjusts it and how.

Cost plus

You pay the actual cost of the work plus the builder's fee, with no ceiling. The number in the proposal is an estimate. The builder carries very little cost risk, and you carry most of it.

That's not a reason to avoid cost plus. It's common on custom homes where the design is still moving or the builder is brought on early, and with a good builder it can be the most honest arrangement there is. But since the total is an estimate, the total isn't where you look.

The fee. Is it a percentage or a fixed amount? A percentage fee grows as the cost grows, which means the builder earns more when the house costs more. A fixed fee doesn't. Also check what the percentage applies to. Some builders apply it to every dollar, including allowances and change orders. Some don't.

What's billed as cost. Same question as with a GMP, and it matters even more here. The project manager, the site superintendent, office staff time, small tools, trucks, cleanup, dumpsters, rework of the builder's own mistakes. Each of those is either in the fee or billed to you on top of it.

How good the estimate is. Ask how it was built. An estimate assembled from current subcontractor quotes on your drawings is a different thing from one built on cost per square foot from the builder's last few houses. Ask what share of the number comes from actual quotes.

Your audit rights. Since you're paying actual cost, you need to be able to see it. The contract should give you access to invoices, receipts, timesheets, and lien waivers, and a monthly report of budget against actual. If it doesn't, you're paying a number you can't check.

Which one fits

There's no right answer that works for every project, but the drawings will tell you a lot. If your drawings and finish selections are complete, a fixed price or a GMP means something, because there's a real scope to commit to. If they're thin, a fixed price ends up being mostly allowances, and you're better off knowing that than pretending the number is firm.

The other question is how much you want to be involved. A fixed price asks less of you during construction. Cost plus asks you, or someone you trust, to actually read the monthly costs.

If your contract is on an AIA form, the A101 is the fixed price version, the A102 is cost plus a fee with a GMP, and the A103 is cost plus a fee without one. Many residential builders use their own contracts instead. Either way, have a construction attorney review the contract itself. What I'm describing here is how to read the bid for construction substance, not legal advice.

Questions worth asking

For a fixed price:

• What does each allowance assume, and what markup applies to overages?
• What's excluded, and where is every exclusion listed?
• What site and utility assumptions is the price built on?
• How are change orders priced and approved?

For a GMP:

• What's included in the cost of the work, line by line?
• How much contingency is inside the GMP, who controls it, and what happens to what's left?
• How are savings split if the job comes in under?
• What can raise the GMP after signing?

For cost plus:

• Is the fee a percentage or a fixed amount, and what does it apply to?
• Which people, tools, and costs are billed to the job, and which are covered by the fee?
• How was the estimate built, and how much of it is backed by current quotes?
• What backup will I see each month, and can I audit the costs?