In this snack-size episode of Home: The Second Story, we dive into the world of construction contract structures—a topic many homeowners find confusing but absolutely essential to understand. We break down the two main contract types: fixed price (or stipulated sum) and cost-plus (often referred to as time and materials), exploring how each affects cost, transparency, and risk.

From Marilyn’s background as a contractor, we hear that contracts are essentially about who carries the risk. In a cost-plus setup, the owner takes on the risk—and reaps any potential savings if material prices drop. In contrast, a fixed-price contract shifts that risk to the contractor, who may build in a cushion to protect against unexpected costs.

We talk about markup structures and how they vary between contractors. A critical point we emphasize is that not all percentages are created equal—one contractor’s 12% markup might include overhead and profit, while another’s 18% could only reflect profit. This makes it essential to ask what’s included in the markup when comparing bids.

Another key topic isallowances in hybrid contracts. These are line items for unknowns—like what’s behind a wall during renovation—and act as mini cost-plus agreements inside a fixed-price contract. Interestingly, while allowances often cover things like tile and appliances, Marilyn notes she always wished they’d be used for unknown site conditions instead—since tile choices can be made upfront.

We also highlight control estimates, which provide a baseline for cost-plus contracts. They’re not binding but offer owners a framework for budgeting. Marilyn reminds us these estimates are often required by consumer protection laws, not just construction best practices.

In terms of billing, fixed-price contracts result in streamlined invoices showing progress against the agreed amount. Cost-plus contracts, on the other hand, provide detailed receipts for every purchase and expense, which architects or owner’s reps typically review before payment.

We touch briefly on change orders, clarifying that in cost-plus contracts, they don’t exist—the contractor builds as directed. In fixed-price arrangements, change orders formalize any scope changes, whether due to material availability, homeowner decisions, or contractor requests. We suggest keeping a change order log to track who initiated each one.

Lastly, we stress that asking questions is not only allowed—it’s encouraged. Homeowners should feel empowered to understand where their money is going but should also respect the realities of construction work. The success of any contract, we agree, depends on clear communication, realistic expectations, and detailed upfront planning.

Have questions? Want to be on our show? Email us!  [email protected]

Learn about our hosts:

Taylor: TPD Architecture and Design: https://tpdarchitect.com

Marilyn: Runcible Studios: https://runciblestudios.com

SherI: Springhouse Architects: https://springhousearchitects.com

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