Building a custom home in the Okanagan is one of the most significant investments you will ever make. Beyond the floor plans and finishes, the foundation of your project isn’t just concrete, it’s your construction contract.
When you begin your journey with a Kelowna home builder, you will likely face a pivotal decision: Should you choose a Cost-Plus or a Fixed-Price contract? Each path offers a different approach to risk, transparency, and budget management. This guide breaks down everything you need to know to choose the right framework for your dream home.
What Is a Construction Contract?
At its core, a construction contract is a legally binding agreement between a homeowner and a builder. It outlines the scope of work, the timeline, the quality of materials, and most importantly, how the project will be paid for.
In the world of custom luxury homes, no two projects are identical. Therefore, the contract serves as a roadmap that manages expectations. It defines who is responsible for what and how “surprises” (which are common in construction) are handled. Understanding the nuances of these agreements is the first step toward a stress-free build.
Understanding Cost-Plus Contracts
A Cost-Plus contract is often described as an “open-book” agreement. In this model, the homeowner pays the builder for the actual project costs (including labour, materials, and sub-contractor fees) plus a pre-negotiated fee for the builder’s expertise, management, and overhead.
This fee is typically structured in one of two ways:
Percentage Fee: The builder receives a set percentage of the total project costs (e.g., 12–15%).
Fixed Fee: The builder receives a flat dollar amount, regardless of the final cost of materials.
Advantages of Cost-Plus Contracts
Cost-Plus contracts are highly favoured in the luxury custom home market because they offer a level of transparency that is hard to match. You see every invoice from every plumber, electrician, and lumber yard, ensuring there are no hidden markups on the materials you choose. This model also provides maximum flexibility for those who want to refine their vision as the home takes shape.
If you decide halfway through the build that you want to upgrade from standard hardwood to imported Italian marble, a Cost-Plus contract handles this seamlessly, as you simply pay the difference in material costs.
Furthermore, this contract type is fairer in volatile markets; if the price of lumber or copper drops during production, those savings go directly into your pocket rather than remaining with the builder as profit.
Drawbacks of Cost-Plus Contracts
The primary challenge of a Cost-Plus arrangement is the inherent lack of a price ceiling. Because the final cost isn’t known until the last nail is driven, homeowners must be prepared for some budget uncertainty. If material costs spike globally or the project takes longer than expected due to labour shortages, the homeowner bears the full financial burden of those increases. Additionally, these contracts require a higher level of administrative heavy lifting.
Homeowners or their financial advisors must be diligent in reviewing monthly draws and piles of invoices to ensure that every dollar spent aligns with the physical progress seen on the construction site.
Understanding Fixed-Price Contracts
A Fixed-Price contract, also known as a Lump Sum contract, is an agreement where the builder provides a single, total price for the entire scope of work. This price is determined long before construction begins, based on highly detailed architectural drawings, engineering reports, and material specifications. For this model to work effectively, the design must be “frozen” at the start, meaning every faucet, light fixture, and flooring type is selected before the contract is signed so the builder can accurately estimate the total liability.
Advantages of Fixed-Price Contracts
For many homeowners in the Okanagan, the biggest draw of a Fixed-Price contract is the high degree of budget certainty. Knowing exactly what the final check will look like makes securing construction financing and mortgage approvals much simpler for the lender. This model also effectively transfers the financial risk from the homeowner to the builder.
If the price of materials increases significantly during the build, the builder absorbs that cost rather than passing it on. This naturally incentivizes the builder to work efficiently and manage their sub-contractors tightly to protect their predetermined profit margin.
Drawbacks of Fixed-Price Contracts
The rigid nature of Fixed-Price contracts can create friction when the project is not perfectly defined from the outset. Any changes made after the contract is signed must be handled through formal Change Orders, which often involve administrative fees and can cause significant delays in the construction timeline. To protect themselves from the risks of fluctuating market prices, builders often include a substantial contingency buffer in their initial quote.
If the project goes perfectly and those risks never materialize, the builder keeps that extra margin as profit. Additionally, this model offers less transparency, as you generally do not see the individual costs of labour or materials; you only see the final price for the completed project.
Side-by-Side Comparison: Cost-Plus vs Fixed-Price
When comparing these two models, the decision often comes down to who bears the risk and how much flexibility is required.
Cost-Plus contracts offer high flexibility and high transparency but come with an unknown final cost and high risk for the homeowner. In contrast, Fixed-Price contracts provide a set cost and lower risk for the homeowner but offer very little flexibility and low transparency regarding the builder’s internal margins. While Cost-Plus is ideal for complex, high-end custom builds where the scope might evolve, Fixed-Price is better suited for well-defined projects with strict, non-negotiable budgets.
How to Choose the Right Contract for Your Project
Choosing the right model depends heavily on your personality and the complexity of your home. You should consider a Cost-Plus contract if your project involves intricate architectural details or “unknowns,” such as challenging hillside terrain in Kelowna. This model is also best if you want the highest quality possible and do not want a builder to be tempted to cut corners to stay under a fixed budget.
Conversely, you should choose a Fixed-Price contract if you have a strict budget and have already made all your design decisions. This “set it and forget it” approach is perfect for those who want to avoid the stress of fluctuating monthly invoices.
Common Misconceptions Clarified
One common misconception is that Cost-Plus is always more expensive than Fixed-Price. This is not necessarily true because if a Fixed-Price builder pads their quote by twenty percent to cover potential risks and the project goes smoothly, the homeowner has essentially overpaid for that security.
In a Cost-Plus scenario, you pay exactly what the house costs to build. Another myth is that a Fixed-Price contract means the price will never change under any circumstances. In reality, the price can and will increase if you change your mind on a finish or if unforeseen site conditions, such as hitting bedrock during excavation, require a change in the original scope of work.
Before signing a Cost-Plus agreement, you should ask your builder exactly what is included in their management fee and whether it covers items like site supervision, insurance, and small tools. For a Fixed-Price agreement, it is crucial to understand how the builder calculates Change Order costs and its process for handling “allowances.” In both cases, you should ask how often you will receive budget updates and what specific documents, such as insurance certificates and progress schedules, will be provided at each stage of the build.
Final Thoughts: Making an Informed Decision
At LUX Homes, we do not believe in a one-size-fits-all approach to construction. We recognize that every client’s vision, lifestyle, and risk tolerance are unique. Whether you prefer the total transparency of a Cost-Plus model or the rock-solid certainty of a Fixed-Price agreement, our goal is to deliver a quality-first experience that prioritizes your peace of mind.
As your Kelowna home builder, we emphasize clear communication and customized solutions that can even blend these models to suit your specific needs, ensuring your Okanagan dream home is built on a foundation of trust and excellence.
Frequently Asked Questions
What is included in a cost-plus contract’s “builder’s fee”? The builder’s fee typically covers the company’s profit, office overhead, and the expertise required to manage the project effectively. At LUX Homes, we provide a clear breakdown of this fee to ensure you are not double-charged for items like site labour or equipment rentals that should be included in the base cost.
Can a fixed-price contract ever increase in cost? Yes, a fixed-price contract can increase if the homeowner requests a change to the original plans or if “unforeseen conditions” arise. For example, if the excavation process reveals poor soil quality that was not caught in the initial surveys, the cost to remedy the foundation will result in a price increase.
Is one contract type better for luxury custom homes? While both can work, Cost-Plus is much more common in the luxury market for homes valued over two million dollars. The high level of customization and the use of rare materials make it difficult for builders to fix a price without adding a massive risk premium that would make the project unfairly expensive for the homeowner.
How do change orders work under each contract? In a Fixed-Price contract, a change order is a formal amendment that adds a specific dollar amount and time to the total project. In a Cost-Plus contract, changes are handled more fluidly; the new costs for labour and materials are simply documented and reflected in the next billing cycle without the need for a new price negotiation.
Which contract offers more transparency to homeowners? Cost-Plus is the clear winner regarding transparency because the homeowner sees the “raw” invoices for everything from lumber to plumbing fixtures. In a Fixed-Price agreement, the builder’s internal profit margins and the specific rates negotiated with sub-contractors remain private and are bundled into the total price.
Do lenders prefer one contract type over the other? Most lenders prefer Fixed-Price contracts because they present a lower risk for the loan-to-value ratio.
How are material price fluctuations handled in cost-plus vs fixed-price agreements? In a Cost-Plus agreement, the homeowner pays the current market rate, meaning they benefit if prices drop and pay more if they rise. In a Fixed-Price agreement, the builder is traditionally responsible for any price increases, although many modern contracts now include “escalation clauses” to protect the builder from extreme, unforeseen spikes in commodity prices.
What documents should accompany each contract? Regardless of the contract type, several essential documents should be included. These include a highly detailed Scope of Work, a comprehensive Progress Schedule, proof of Insurance Certificates, and a Specifications Sheet listing every single finish, fixture, and appliance to be installed in the home.