Comparing a Fixed Price Bid to a Cost Plus Estimate

Say two builders price your house. One sends a fixed price of $2,400,000. The other sends a cost plus estimate of $2,150,000. (Illustrative numbers.) The second one looks $250,000 cheaper.

It might be. But those two numbers aren't the same kind of thing. The first is a commitment. The second is a forecast. Comparing them straight across is like comparing a quoted price to a weather report. Before you decide anything, you have to put them on the same footing.

Why the numbers aren't the same kind of thing

A fixed price builder is taking on the risk that the job costs more than they thought. They price that risk in, usually as a contingency and margin you never see. If framing runs long or lumber jumps, they absorb it.

A cost plus builder isn't taking that risk. You are. Their estimate is their best guess at what the house will cost, and you'll pay what it actually costs, plus their fee. Some estimates carry a contingency and some don't. Some are built from current subcontractor quotes, and some are built from cost per square foot on the last few houses.

So the fixed price includes a cushion for things going wrong, and the estimate may not. That alone can explain a big part of the gap.

Putting them on the same footing

Make sure they priced the same house. Same drawing set, same date, same finish level. Then set the allowances yourself and ask both builders to use your numbers. If one builder carried $15,000 for lighting and the other $40,000 (illustrative), that difference has nothing to do with who builds for less.

Ask how the estimate was built. What share of it comes from actual quotes on your drawings, and what share from the builder's historical costs? An estimate with most of the major trades backed by quotes is a much better forecast than one built on averages.

Ask what contingency the cost plus builder would recommend. If the estimate doesn't carry one, ask what they'd hold back for surprises on a house like yours, and add it. The fixed price already has that money in it. You're just making it visible on the other side.

Check what the estimate leaves out. Cost plus estimates sometimes leave out the soft middle of the job: supervision, general conditions, winter protection, cleanup. On a cost plus job, those get billed to you as they happen. Make sure they're in the estimate, and that the fee is applied to them the way it will be on the real invoices.

Look at the schedule. On a cost plus job, a longer schedule costs you directly, because supervision and general conditions are billed every month the job runs. On a fixed price job, delays the builder causes are mostly their cost. Two estimates with different durations aren't pricing the same project.

What the adjusted comparison can look like

Here's the same example after that work. All numbers are illustrative, and each addition includes the builder's fee.

Cost plus estimate	Amount
Estimate as submitted	$2,150,000
Allowances raised to your amounts	+$45,000
Winter conditions not carried	+$38,000
Contingency the builder recommends	+$110,000
Adjusted estimate	$2,343,000

The gap went from $250,000 to $57,000. And the fixed price is still a commitment, while the adjusted estimate is still a forecast. Whether $57,000 is worth paying for that commitment is a real question, and a fair one. It's just a very different question from the one you started with.

Sometimes the gap holds up. Some builders run leaner, and a cost plus builder with good subcontractor relationships can deliver a better house for less. The point isn't that the lower number is wrong. It's that you can't tell until the two are measuring the same thing.

It isn't only about the number

Once the numbers are comparable, the choice comes down to things a spreadsheet doesn't capture. How much do you trust each builder? How complete are your drawings? How much of your time, or someone else's, do you want to spend reading monthly cost reports? A cost plus job with a builder you trust and a clear reporting process can be a great arrangement. A fixed price with thin allowances can turn into cost plus by change order.

Questions worth asking the cost plus builder:

• How much of this estimate comes from current quotes on my drawings?
• What contingency would you recommend for a house like this, and is it in the number?
• Are supervision, general conditions, and winter conditions in the estimate?
• What does your fee apply to?
• What will I see each month to track cost against the estimate?

And the fixed price builder:

• Are your allowances set to my amounts?
• What's excluded, and what site assumptions is the price built on?
• How are change orders priced?