Introduction

When it comes to hiring a contractor, understanding how the financials are set up can make or break your project.

In this post, we’ll dive into two common types of contractor agreements: Cost Plus and Lump Sum (Fixed Cost).

Both have their pros and cons, and I’ll walk you through each to help you make the best decision for your remodeling project.

What is Cost Plus?

Cost Plus is a pricing model where the homeowner pays for the actual cost of materials and labor, plus a fee or percentage for the contractor’s profit.

Pros of Cost Plus

• Flexibility: If you’re doing a larger or more complex remodel, the Cost Plus system offers flexibility since the price adjusts based on the project’s progress.
  
• Quick Start: Cost Plus agreements can often get projects started faster because the initial budget is more of a ballpark estimate rather than a fully locked-in figure.
  
  

Cons of Cost Plus

• Risk of Going Over Budget: In most cases, your project is likely to go over budget. That’s just the nature of how remodeling tends to go, especially when the scope isn’t fully defined upfront.
  
  

Example of Cost Plus Pricing

Let’s say you want to remodel your kitchen but aren’t sure about the layout or materials. With a Cost Plus model, you would move step by step:

1. Start with demolition, receive a charge for that.
   
2. Bring in a plumber to move pipes, and receive a cost for that.
   
3. Every trade and task is billed as it happens.

In this setup, you, the homeowner, are responsible for keeping track of the budget and ensuring the costs stay under control.

What is Lump Sum / Fixed Cost?

A Lump Sum (or Fixed Cost) agreement is a flat fee for the entire project.

The contractor gives you a price for the whole job, and you pay that amount regardless of how long or complicated the work ends up being.

Pros of Lump Sum

• Price Certainty: Lump Sum is ideal for investors or homeowners with simpler remodels, as you know exactly what the project will cost from the start.
• No Financial Juggling: With Lump Sum, you don’t have to deal with constant changes to the budget. Usually, the cost is broken up into two or three payments—like a deposit, a mid-project payment, and a final payment.
  
  

Cons of Lump Sum

• Savings Go to the Contractor: If the project comes in under budget, the contractor keeps the savings—not you.
• Contractor’s Cushion: Contractors often build in a cushion to protect themselves in case of unexpected issues, which can lead to a slightly higher price than the actual cost.
  
  

Example of Lump Sum Pricing

Let’s say you’re doing that same kitchen remodel. We come in and say, “Okay, your kitchen is going to be $30,000.” You pay a deposit, and we get started on the work. The price is fixed, but that flat fee means you won’t see any cost savings if the project comes in under budget.

Conclusion

In summary, Cost Plus offers more flexibility, while Lump Sum provides a fixed price with less room for adjustment.

The main risk with Lump Sum is that the contractor assumes the risk of cost overruns, while with Cost Plus, you, the homeowner or investor, are responsible for any cost increases.

Thanks for reading my breakdown of Cost Plus vs. Lump Sum. If you’re ready to get started on your project, book a call with me or reach out directly. I’m here to help!