FHB Logo Facebook LinkedIn Email Pinterest Twitter X Instagram Tiktok YouTube Plus Icon Close Icon Navigation Search Icon Navigation Search Icon Arrow Down Icon Video Guide Icon Article Guide Icon Modal Close Icon Guide Search Icon Skip to content
Subscribe
Log In
  • How-To
  • Design
  • Tools & Materials
  • Restoration
  • Videos
  • Blogs
  • Forum
  • Magazine
  • Members
  • FHB House
  • Podcast
Log In
Design

A Contract That Makes Everybody Happy

An architect explains why fixed-price and T&M contracts are not your only options when hiring a general contractor.

By Robert Knight Issue 179 (Houses)
  • X
  • facebook
  • linkedin
  • pinterest
  • email
  • add to favorites Log in or Sign up to save your favorite articles

In terms of making clients happy, the most important events in a custom residential project are picking a builder and structuring a contract.

There are two common ways of hiring a general contractor: at a fixed price or on the basis of time and materials. At my firm, we aren’t fond of either approach, but we have found a third option that’s fair to both builder and client. First, though, let’s take a look at how the two industry standards work.

A fixed-price contract usually is awarded after competitive bidding. A group of builders receives a complete set of construction documents, and they return some weeks later with proposals to build the house for a set amount of money. The job normally goes to the low bidder.

“The moment a contract is signed, the client wants to get a bit more for the money, while the builder wants to provide a bit less. That’s just human nature.”

Although the builder is the one taking the risks, potential problems also exist for the client. First, in a hot market where demand for builders is high, there’s no guarantee they will price their work aggressively. They may come up with a rough estimate, add a very high profit, and figure if they get the job, then they’ll be well covered. Even the lowest bid may not be a good deal.

Second, fixed-price contracts require complete construction documents, which can cost approximately 5% of the project total. If the bids are too high and the drawings need to be revised, the architect typically doesn’t have enough information from the bidder to know exactly where to change the plans.

Finally, a subtle but nevertheless important adversarial quality exists in the relationship between client and builder. The moment a contract is signed, the client wants to get a bit more for the money, while the builder wants to provide a bit less. That’s just human nature.

Time-and-materials bids

The other standard is a time-and-materials contract, abbreviated as T&M or cost-plus. A builder is hired on reputation, availability, good chemistry, and possibly on what he guesses the building will cost. The client pays an hourly wage to all workers, which includes a markup over their actual cost to the builder. The builder also adds a percentage to the cost of materials. In Maine, where my firm is located, the markup usually ranges from 12% to 17%.

In a perfect world, there’s nothing wrong with this type of contract. It’s flexible and easy to administer. Assuming the builder is competent and honest, the client gets a house for exactly what it costs, plus a known markup for overhead and profit.

However, the contract’s flaws  are obvious. The builder makes a profit on every dollar he spends. At some point, especially if the job is over budget, the client may start to feel taken advantage of.

Shopping for an estimate when using a cost-plus contract is never a good idea. The worst decision a client can make is to pick a builder based on what he estimates the cost of the job will be and then sign a contract that doesn’t obligate him to that number. If clients must shop for a builder based on price, they should bite the bullet, pay for the drawings, and put out the job for a fixed-price bid.

There’s a better way

If there were a contract that solved every single problem, it would be locked in a vault at the American Bar Association along with the lawyer who wrote it. In fairness, it was my lawyer (who hates lawsuits) who put me onto the cost-plus-a-fee contract, and I think it balances risk and reward at about the right point. Unlike a time-and-materials contract, this one has a fixed fee that contains all of the overhead and profit.

Let’s take a hypothetical $460,000 house. In a fixedprice contract, the builder bids $460,000. If the house ends up costing more, the builder eats the overage; if it costs less, he gets an additional profit.

In a time-and-materials contract, the builder estimates the house will cost $400,000 plus $60,000 (a 15% markup). If the house ends up costing more, the builder’s fee goes up, too.

“Clients can dicker over the fee, but it’s really chump change compared to the total cost of the job.”

With cost plus a fixed fee, the client signs a contract for the $60,000 plus the cost of construction, which is priced at the builder’s actual out-of-pocket cost. Whether the house costs $350,000 or $500,000, the client still pays $60,000 for the builder’s overhead and profit.

The advantages are obvious. If the cost exceeds the estimate, the builder isn’t making a fatter fee. Getting the job done and moving on to another one will be to his advantage. However, the builder will not be taking such a bath that he is likely to walk off the job or go bankrupt, a real risk for smaller builders.

What are the disadvantages for clients? They can occur in the estimating process. The client needs assurances that both the estimate and the fee are reasonable. In my office, we compare the costs and the fee against a database of jobs. If it appears the builder has inflated the cost of construction to justify a proportionately higher fee, we encourage the client to move on to another builder.

Clients can dicker over the fee, but it’s really chump change compared to the total cost of the job. Why not give the builder the fee he wants and get him on your side? He may be more inclined to go after reducing costs because he’ll still get the same fee.

Risks for the builder, too

Disadvantages for builders arise when they estimate from incomplete documents, and the client/architect team subsequently inflates the building’s quality and complexity as the drawings are completed. The builder could end up building not the $400,000 house he was shown, but the $600,000 house the owner and the architect were dreaming of—all for the same markup.

The solution is for the builder to insist on change orders, including an adjustment to the fee when the scope of the work is altered. Generally, that means anything that makes the project take longer, but the change also may include substantial quality upgrades in materials that increase the builder’s liability. Being rigorous about change orders and their effect on the bottom line is to everyone’s advantage. If builders insist on it, this kind of contract can make for a good deal all around.

In our office, we usually recommend an old contract (A117- 1987) from the American Institute of Architects (AIA). Over the years, my lawyer added annotations that we believe offer more protection for both our clients and their builders.

The current AIA contract designed for cost of the work plus a fee is A114-2001. The only drawback with this form may be that it incorporates the 40-page A201 “General Conditions,” which many people find to be too much material.

To quote my attorney: “I would use the A114 when (a) an actual copy of A201 will be attached to it and will be read and understood by both the owner and the contractor (not to mention the architect); and (b) the parties will actually follow the A114/A201 procedures and requirements instead of the simpler requirements of the old A117. A super-duper contract that people don’t actually follow is worse than a so-so contract that people take seriously as a guide to their conduct and relationship.”

Talk to your attorney. You are signing an important contract.

Sign up for eletters today and get the latest how-to from Fine Homebuilding, plus special offers.

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters
×

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

New Feature

Fine Homebuilding Forums

Ask questions, offer advice, and share your work

  • X
  • facebook
  • linkedin
  • pinterest
  • email
  • add to favorites Log in or Sign up to save your favorite articles

Log in or create an account to post a comment.

Sign up Log in

Become a member and get full access to FineHomebuilding.com

Up Next

Video Shorts

Featured Story

Podcast Episode 684: Masonry Heaters, Whole-House Ventilation, and Porch Flooring

Listeners write in about fireplaces and ask questions about whole-house ventilation, traditional porch flooring, and gutter sealants.

Featured Video

How to Install Cable Rail Around Wood-Post Corners

Use these tips to keep cables tight and straight for a professional-looking deck-railing job.

Related Stories

  • An Easier Method for Mitered Head Casings
  • A Practical Approach to Exterior Insulation
  • Making and Installing Wood Wall Paneling
  • FHB Podcast Segment: Designing and Building an Efficient Slab-On-Grade Home

Discussion Forum

Recent Posts and Replies

  • |
  • |
  • |
  • |
  • |
  • |
View More Create Post

Highlights

Fine Homebuilding All Access
Fine Homebuilding Podcast
Tool Tech
Plus, get an extra 20% off with code GIFT20

Video

View All Videos
  • Building a Detached Shop with Full Utilities and HVAC
  • FHB Podcast Segment: Tips on Building a Career in Construction
  • Podcast 619 Members-only Aftershow —Ian’s Tips for Construction Budgets
  • Podcast 609: Members-only Aftershow — Building Business With Timber HP President Matt O’Malia
View All

Business

View All Business Articles
  • Pros of Apprenticeship Programs
  • Hiring Entry-Level Employees
  • Networking Happy Hour at JLC LIVE, Friday, March 28, 3PM-5PM at Booth 727
View All Business Articles

Fine Homebuilding Magazine

  • Issue 331 - June 2025
    • A More Resilient Roof
    • Tool Test: You Need a Drywall Sander
    • Ducted vs. Ductless Heat Pumps
  • Issue 330 - April/May 2025
    • Deck Details for Durability
    • FAQs on HPWHs
    • 10 Tips for a Long-Lasting Paint Job
  • Issue 329 - Feb/Mar 2025
    • Smart Foundation for a Small Addition
    • A Kominka Comes West
    • Making Small Kitchens Work
  • Issue 328 - Dec/Jan 2024
    • How a Pro Replaces Columns
    • Passive House 3.0
    • Tool Test: Compact Line Lasers
  • Issue 327 - November 2024
    • Repairing Damaged Walls and Ceilings
    • Plumbing Protection
    • Talking Shop

Fine Home Building

Newsletter Sign-up

  • Fine Homebuilding

    Home building tips, offers, and expert advice in your inbox.

  • Green Building Advisor

    Building science and energy efficiency advice, plus special offers, in your inbox.

  • Old House Journal

    Repair, renovation, and restoration tips, plus special offers, in your inbox.

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters

Follow

  • Fine Homebuilding

    Dig into cutting-edge approaches and decades of proven solutions with total access to our experts and tradespeople.

    Start Free Trial Now
    • Facebook
    • Instagram
    • X
    • LinkedIn
  • GBA Prime

    Get instant access to the latest developments in green building, research, and reports from the field.

    Start Free Trial Now
    • Facebook
    • YouTube
  • Old House Journal

    Learn how to restore, repair, update, and decorate your home.

    Subscribe Now
    • Facebook
    • Instagram
    • X
  • Fine Homebuilding

    Dig into cutting-edge approaches and decades of proven solutions with total access to our experts and tradespeople.

    Start Free Trial Now
    • Facebook
    • Instagram
    • X
    • LinkedIn
  • GBA Prime

    Get instant access to the latest developments in green building, research, and reports from the field.

    Start Free Trial Now
    • Facebook
    • YouTube
  • Old House Journal

    Learn how to restore, repair, update, and decorate your home.

    Subscribe Now
    • Facebook
    • Instagram
    • X

Membership & Magazine

  • Online Archive
  • Start Free Trial
  • Magazine Subscription
  • Magazine Renewal
  • Gift a Subscription
  • Customer Support
  • Privacy Preferences
  • About
  • Contact
  • Advertise
  • Careers
  • Terms of Use
  • Site Map
  • Do not sell or share my information
  • Privacy Policy
  • Accessibility
  • California Privacy Rights

© 2025 Active Interest Media. All rights reserved.

Fine Homebuilding receives a commission for items purchased through links on this site, including Amazon Associates and other affiliate advertising programs.

  • Home Group
  • Antique Trader
  • Arts & Crafts Homes
  • Bank Note Reporter
  • Cabin Life
  • Cuisine at Home
  • Fine Gardening
  • Fine Woodworking
  • Green Building Advisor
  • Garden Gate
  • Horticulture
  • Keep Craft Alive
  • Log Home Living
  • Military Trader/Vehicles
  • Numismatic News
  • Numismaster
  • Old Cars Weekly
  • Old House Journal
  • Period Homes
  • Popular Woodworking
  • Script
  • ShopNotes
  • Sports Collectors Digest
  • Threads
  • Timber Home Living
  • Traditional Building
  • Woodsmith
  • World Coin News
  • Writer's Digest
Active Interest Media logo
X
X
This is a dialog window which overlays the main content of the page. The modal window is a 'site map' of the most critical areas of the site. Pressing the Escape (ESC) button will close the modal and bring you back to where you were on the page.

Main Menu

  • How-To
  • Design
  • Tools & Materials
  • Video
  • Blogs
  • Forum
  • Project Guides
  • Reader Projects
  • Magazine
  • Members
  • FHB House

Podcasts

  • FHB Podcast
  • ProTalk

Webinars

  • Upcoming and On-Demand

Podcasts

  • FHB Podcast
  • ProTalk

Webinars

  • Upcoming and On-Demand

Popular Topics

  • Kitchens
  • Business
  • Bedrooms
  • Roofs
  • Architecture and Design
  • Green Building
  • Decks
  • Framing
  • Safety
  • Remodeling
  • Bathrooms
  • Windows
  • Tilework
  • Ceilings
  • HVAC

Magazine

  • Current Issue
  • Past Issues
  • Magazine Index
  • Subscribe
  • Online Archive
  • Author Guidelines

All Access

  • Member Home
  • Start Free Trial
  • Gift Membership

Online Learning

  • Courses
  • Project Guides
  • Reader Projects
  • Podcast

More

  • FHB Ambassadors
  • FHB House
  • Customer Support

Account

  • Log In
  • Join

Newsletter

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

Follow

  • X
  • YouTube
  • instagram
  • facebook
  • pinterest
  • Tiktok

Join All Access

Become a member and get instant access to thousands of videos, how-tos, tool reviews, and design features.

Start Your Free Trial

Subscribe

FHB Magazine

Start your subscription today and save up to 81%

Subscribe

We hope you’ve enjoyed your free articles. To keep reading, become a member today.

Get complete site access to expert advice, how-to videos, Code Check, and more, plus the print magazine.

Start your FREE trial

Already a member? Log in

Privacy Policy Update

We use cookies, pixels, script and other tracking technologies to analyze and improve our service, to improve and personalize content, and for advertising to you. We also share information about your use of our site with third-party social media, advertising and analytics partners. You can view our Privacy Policy here and our Terms of Use here.

Cookies

Analytics

These cookies help us track site metrics to improve our sites and provide a better user experience.

Advertising/Social Media

These cookies are used to serve advertisements aligned with your interests.

Essential

These cookies are required to provide basic functions like page navigation and access to secure areas of the website.

Delete My Data

Delete all cookies and associated data