Why Fixed-Price Contracts Work in Your Favor

In construction, how we structure contracts dictates the incentives that drive behavior. Cost-plus contracts, for instance, create incentives that often don’t serve the customer’s best interests.

Here’s the psychology behind it: with a cost-plus contract, the builder earns a percentage on every dollar spent, say 20%. So, if your build costs $200,000, the builder’s fee is $40,000. But if it ends up at $250,000 due to higher supply costs, unanticipated delays, or any reason, the builder’s fee jumps to $50,000. More spending equals more profit for the builder, which can discourage efforts to minimize costs. There’s little motivation to negotiate the best rates with subcontractors or find ways to be more efficient. In fact, the incentive may be to do just the opposite.

Contrast this with a fixed-price contract. Here, we profit by finding efficiencies and staying on budget. When costs rise unexpectedly, that comes out of my pocket, not yours. So, my incentive is to negotiate hard, minimize waste, and complete your home efficiently. Aligned incentives mean I’m as invested in your home’s success as you are—it’s about delivering a super solid house at a fair price.

Aligned incentives result in better outcomes for you, the homeowner. If you’re considering building a custom home and want to know more about contract structures that genuinely protect your interests, give me a call at (469) 853-7952. Let’s discuss what’s best for your specific situation, with honest answers from over 25 years of experience.