Fixed-Price vs. Cost-Plus Contracts: Choosing the Right Structure

A fixed-price (lump-sum) contract sets one total price for a defined scope of work. The contractor absorbs the risk of cost overruns on that defined scope, but any change outside the original scope becomes a change order, typically priced and approved separately. This structure works best when the scope is fully defined before work starts -- a well-drawn, permit-ready renovation or a standard new build.

A cost-plus contract bills the actual cost of labour and materials plus an agreed fee (a percentage or a fixed markup). This shifts cost risk to the owner but gives more flexibility when scope is genuinely unknown at the start -- for example, a renovation where wall openings might reveal unknown structural or moisture conditions. Cost-plus requires more trust and more active oversight from the owner, since there is less financial pressure on the contractor to control costs tightly.

A middle path many Canadian contractors use is a guaranteed maximum price (GMP): cost-plus billing up to an agreed ceiling, with savings below that ceiling typically shared or returned to the owner. This protects the owner from open-ended cost-plus risk while still allowing flexibility for unknowns.

Whichever structure is used, the contract should clearly define what counts as a change order, how changes are priced, and who must approve a change in writing before work proceeds. Verbal change approvals are one of the most common sources of billing disputes.