We see it all the time. A family finds a builder they like, gets a proposal that fits their budget, and is ready to sign. Then we look closely at the numbers and find big, rounded estimates, allowances that won’t cover the finishes they’ve already picked, and whole categories of work that were never priced.
The number at the bottom of a proposal only means something if you know what’s behind it. If you’re planning to build or remodel in 2027, the contract you sign this winter will shape your budget, your schedule and your stress level for the next two years.
The contract you sign shapes everything that follows
Most custom homes are built under one of three contract types: cost-plus, fixed price or guaranteed maximum price. Each one handles cost risk differently, and each one comes with its own blind spots.
Before you compare proposals, ask yourself one question: What could make me pay more than this number after I sign? The answer is different for every contract type, and it’s the most important thing to understand before you commit.
Cost-plus: look past the percentage
Most custom homes are built on a cost-plus basis. You pay the actual cost of the work (subcontractors, materials and labor), plus a fee for the builder. If construction costs $1 million and the fee is 15 percent, you pay $150,000 on top of the work itself.
That sounds simple, but there’s a layer most owners miss: general conditions. These are the costs of running your job, like the superintendent, the project manager and site expenses. Some builders fold them into their fee. Others bill them separately. Either approach can be fair, but you can’t compare two bids until you add them back together.
Here’s how that plays out on a hypothetical $2 million project:
| Builder A | Builder B | |
|---|---|---|
| Quoted fee | 12% ($240,000) | 18% ($360,000) |
| General conditions | Billed separately ($200,000) | Included in fee |
| Total cost to manage the job | $440,000 | $360,000 |
The builder with the “lower” fee costs $80,000 more. Always compare the total delivery cost, not the percentage.
Two more things to know about cost-plus:
- Rising prices are usually your problem. If material or labor costs go up mid-project, you typically pay the difference, and a percentage fee grows right along with it.
- Transparency isn’t optional. You should see the underlying subcontractor bids and invoices behind every bill. A builder who pushes back on that request is telling you something important.
Before you sign a cost-plus contract, ask:
- What exactly does the fee cover, and what’s billed separately?
- Will I see subcontractor bids, invoices and lien waivers with every payment request?
- Do you get multiple bids for each trade, and will you show them to me?
- How are job-site costs handled if the schedule runs long?
- Who pays for mistakes made by your team or your subcontractors?
Fixed price: certainty comes at a price
A fixed-price contract (also called a stipulated sum or lump sum) means the builder commits to one number for the work as drawn. The appeal is obvious: you know the cost going in.
The catch is that the builder is now carrying the risk if costs rise, and they price that risk in. If concrete is a $100,000 line item, a fixed-price bid might carry it at $110,000 or $120,000. If costs stay flat, you’ve paid a premium for certainty you didn’t end up needing.
Keep three things in mind:
- Most builders will only fix a price on a finished design, with every finish selected. Many custom builders won’t offer a fixed price at all in today’s market.
- “Fixed” covers only what’s on the drawings. Anything you change, add or leave undecided comes back as a change order.
- Allowances still move. If the contract includes allowances, the final price moves with them.
Guaranteed maximum price: a ceiling, with conditions
A guaranteed maximum price (GMP) is a hybrid. You pay actual costs plus a fee, like cost-plus, but the total can’t go above an agreed ceiling unless the scope changes.
GMPs are more common in commercial construction, but they do show up in high-end residential work. They need the same thing a fixed price does: complete drawings and selected finishes. Without those, there’s nothing reliable to set the ceiling against.
If you’re offered a GMP, ask what’s excluded from the ceiling, how allowances and contingency are handled inside it, and who keeps the savings if the project comes in under it. A well-written GMP shares those savings, so you and the builder both benefit when costs come in lower.
How low allowances make a bid look cheaper
An allowance is a placeholder in the budget for something that hasn’t been selected yet, like countertops or cabinetry. The problem is that allowances are often set lower than what your selections will actually cost. Sometimes that’s an honest miss. Sometimes it’s a way to make a bid look more competitive, knowing the difference will come back later as change orders.
Here’s how quickly that adds up:
| Item | Allowance in the bid | What it actually cost | Increase |
|---|---|---|---|
| Countertops | $50,000 | $75,000 | $25,000 |
| Cabinetry | $150,000 | $250,000 | $100,000 |
| Pool | $100,000 | $140,000 | $40,000 |
| Total | $300,000 | $465,000 | $165,000 |
That’s $165,000 from just three line items, before the builder’s fee is added on top. None of them feels alarming on its own. Together, they can take a budget from comfortable to stretched.
The best protection is to make your selections before you bid, so there are fewer allowances to begin with. For anything that’s still open, ask the builder what each allowance is based on, and whether it includes delivery, installation and tax.
The bigger risk: signing before the design is finished
The contract type matters. But in our experience, the biggest risk isn’t which contract you choose. It’s signing any contract before the design is complete and the work has been properly bid.
Here’s a simplified cost-plus example. Say a builder’s estimate shows $1 million in construction costs, with a 15 percent fee. Because the drawings weren’t finished, the real costs come in 30 percent higher. That isn’t unusual.
| What you signed | What it actually cost | |
|---|---|---|
| Construction costs | $1,000,000 | $1,300,000 |
| Builder’s fee (15%) | $150,000 | $195,000 |
| Total | $1,150,000 | $1,495,000 |
That’s $345,000 more than planned, and $45,000 of it is extra builder fee on costs that grew.
Now add financing. If your construction loan and cash on hand were sized to the $1.15 million estimate, the difference has to come from somewhere. For most families, that means out of pocket, in the middle of the project, when there’s no good way to walk away.
An incomplete design creates quality risk too. When the drawings don’t spell out the insulation, the cabinet line or the appliance models, the builder gets to decide. You might get the $100,000 cabinets instead of the $200,000 ones you pictured, and upgrading becomes a change order. Complete drawings are the standard your builder has to build to. Without them, you have no leverage. This is exactly why pre-construction matters as much as it does.
Put the decisions in the right order
The good news is that this is one of the easiest problems in construction to prevent. It comes down to sequence:
- Finish the design and select your finishes. The more that’s decided, the fewer allowances and assumptions are left in the bid.
- Get bids from more than one builder on the same drawings. Then line them up side by side: fees, general conditions, allowances and exclusions.
- Size your financing to the real number. Base your loan and cash plan on the bids, not on an early estimate.
- Negotiate the contract last. Make sure it references the complete drawings and specifications, so you have a clear standard to hold the builder to.
Some lenders require a signed construction contract before they’ll finalize a loan. If yours does, steps 3 and 4 may move together. What matters is that both rest on a finished design and real bids.
What a good builder will do
There are a lot of honest, talented builders out there, and the best ones welcome this process. If your drawings aren’t finished, a good builder will tell you so, set realistic allowances, and explain what still needs to be decided. They’ll show you the underlying bids, walk you through their reasoning, and answer hard questions without getting defensive.
Be cautious of the opposite: a bid that comes in well below the others, a single number with no backup, or resistance when you ask to see the costs behind it. Our builder selection process is built to surface exactly these differences before you commit.
