The contract structure is one of the first real decisions in a custom build, and it quietly shapes everything after it: how bids compare, how changes get priced, how much you see of where the money goes, and who absorbs the surprises. Most buyers sign one without fully understanding the other. Here's how both actually work, and what to watch for in Texas specifically.
How a Fixed-Price Contract Works
On a fixed-price contract (also called lump-sum or stipulated-sum), the builder prices the home from your plans and specifications and commits to that number. If lumber spikes or a trade bids high, that's the builder's problem, not yours.
That certainty isn't free. A builder taking on the overrun risk prices it in, usually as contingency built into the number. You won't see it as a line item, and if the job comes in under, the difference stays with the builder.
The other thing to understand is what "fixed" covers. The price is fixed for the scope as written. It does not usually cover:
- Allowances. Flooring, lighting, plumbing fixtures, and appliances are often carried as allowances. Pick something above the allowance and you pay the difference.
- Change orders. Anything you add or move after signing is priced separately, usually with a markup.
- Site unknowns. Rock, poor soil, or utility surprises are frequently excluded or carried as allowances until they're known.
Fixed-price works best when the plans are complete, selections are mostly made, and the lot has been properly evaluated. The more that's still undecided, the more of the "fixed" price is really allowances and exclusions.
How a Cost-Plus Contract Works
On a cost-plus contract, you pay what the house actually costs, every invoice from every trade and supplier, plus a fee to the builder for running the job. A good cost-plus builder works open-book: you see the bids, the invoices, and the budget-to-actual every month.
The fee is usually set one of two ways, and the difference matters:
- Percentage fee. The builder earns a percentage of construction cost. Builder fees generally fall in the 10 to 20 percent range. The catch: when costs go up, the fee goes up with them.
- Fixed fee. The builder's fee is a set dollar amount regardless of what the materials cost. It removes the incentive problem, though the fee may be adjusted if the scope changes substantially.
Cost-plus fits projects where design is still evolving, where the lot or the engineering carries real unknowns, or where the buyer wants to make decisions as the house takes shape. It also tends to suit buyers who want to see exactly where every dollar went. The tradeoff is simple: there's no ceiling unless you build one in.
The Middle Ground: Cost-Plus With a Cap
A common hybrid is cost-plus with a guaranteed maximum price (GMP), sometimes called a not-to-exceed. You get open-book pricing, and the builder agrees that the total won't pass a set number for the agreed scope. Some versions split any savings under the cap between owner and builder.
It sounds like the best of both, and sometimes it is. Just read it carefully: a GMP only caps the scope it describes. Allowances, change orders, and excluded site work still move the final number.
| Fixed-Price | Cost-Plus | |
|---|---|---|
| Who carries overruns | Builder | You |
| What you see | The total | Every invoice |
| Best fit | Finished plans | Evolving plans |
| Where it goes wrong | Thin allowances | No ceiling |
Where Each One Goes Wrong
Fixed-price usually goes wrong at the allowances. A bid can look $100,000 cheaper than the next one simply because its allowances are set below what you'll actually pick. You find out at the tile showroom, a year into the job. When you compare fixed-price bids, compare the allowance schedules line by line before you compare the totals.
Cost-plus usually goes wrong at the budget. Without a solid estimate up front and monthly budget-to-actual reports, costs drift a few thousand at a time until the total is somewhere nobody planned. A percentage fee makes it worse, because the builder earns more as the house gets more expensive.
Both go wrong at change orders. Whatever structure you choose, know the change-order markup in writing and require a signed, priced approval before any change proceeds. Our North DFW cost guide covers how change orders and allowances become the two biggest budget surprises.
“The contract type isn't what protects you. Knowing exactly what you signed is.”
Texas-Specific Protections, Whichever Contract You Sign
Texas lien and trust-fund law applies no matter how the contract is structured. A few pieces every buyer should know:
- Homestead contracts have to be done right. If the home will be your homestead, Texas requires a written contract signed by the owner before any work is done or materials are delivered. If you're married, both spouses must sign, and the contract is filed with the county clerk.
- The 10 percent reserve. Texas lien law protects owners who hold back 10 percent of the contract price, or of the value of the work done, during construction and for 30 days after completion. Ask your builder and your lender how the draw schedule handles it.
- Your payments are trust funds. Under the Texas Construction Trust Fund Act, money you pay a builder for construction is held in trust for the subs and suppliers who did the work. On homestead contracts over $5,000, the builder must run the money through a dedicated construction account and keep records of what came in and went out.
- Final bills-paid affidavit. At final payment on a residential job, the builder must give you a signed affidavit that every sub and supplier has been paid, or list who hasn't. A false affidavit is a criminal offense, and the person who signs it is personally liable.
- Lien waivers every draw. Not required by every contract, but they should be. In Texas, an unpaid sub can file a lien on your home even if you paid the builder in full.
This is general information, not legal advice. Before you sign any construction contract, have a Texas real estate or construction attorney review it, especially the payment, change-order, and lien-waiver sections.
Questions to Ask Before You Choose
- Which structure do you recommend for my project, and why?
- On fixed-price: can I see the full allowance schedule, and what are the allowances based on?
- On cost-plus: is the fee a percentage or a fixed amount? Are subs or materials marked up on top of it?
- How will I see the budget against actual costs, and how often?
- What's the change-order markup, and does any change proceed without my signed approval?
- What's excluded from the price, especially site work, utilities, and anything the soil report might turn up?
- Will I get conditional and unconditional lien waivers with every draw?
A builder who answers these plainly is a builder you can work with under either contract. For the full list, see 25 Questions to Ask Before You Hire a Custom Builder.
So Which One Should You Pick?
If your plans are complete, your selections are mostly made, and the lot has been evaluated, fixed-price buys you certainty, and that's worth paying for. If you're still designing, the site has open questions, or you want to see every dollar, cost-plus with a realistic budget and regular reporting is often the more honest structure. A cap can bridge the two if it's written carefully.
The wrong answer is choosing based on which bid looks cheaper on day one. On a custom home, the number that matters is the one at closing.