Remodeling Contracts: Fixed Price, Cost-Plus and Allowances

“Should I bid a remodel fixed price or cost-plus?” The honest answer is that it depends on how much of the job you can see before you start. The contract type is how you and the homeowner divide the risk of what you cannot see: rot behind the tile, wiring nobody has opened in decades, a cabinet the owner has not chosen yet. Pick the type that puts each risk on the person who can control it.

Why remodels carry more unknowns

The houses are older than they used to be. Harvard’s Joint Center for Housing Studies reports that the median age of owner-occupied homes hit 42 years in 2023, up from 37 in 2013 and 31 in 2003. Materials climbed too: the same report found lumber and plywood prices 21% above 2019 levels through the third quarter of 2024, and insulation, gypsum and plastic construction products 42% to 50% above. And in 2023, 64% of residential remodelers reported some or serious shortages of skilled trade subcontractors, according to the National Association of Home Builders data the report cites. Each of those is a way a job can cost more than you planned, and the contract decides who pays for it.

Fixed price: you carry the cost

The American Institute of Architects, which publishes standard construction contract forms, describes a fixed price contract, or stipulated sum, as one “in which you agree to complete the project for a specific amount.” If building what the contract describes costs you more, the difference is yours; if it costs less, so is the savings. AIA says the method “works best when the scope is well defined” and that “the fewer unknowns at the start, the lower your risk of costly change orders later.” Its short-form agreement, A105, is meant for a residential or small commercial project “modest in size and brief in duration,” paid on a stipulated sum.

AIA notes that owners often prefer a fixed price because they know the cost before work begins, and California’s guidance is written around one: its Contractors State License Board tells contractors to use the heading “CONTRACT PRICE” followed by the amount in dollars and cents, and its sample clause is a fixed sum adjusted only by written change orders and allowances. A fixed price works on a remodel when you protect it in three ways:

• A scope tight enough to price. The CSLB’s own list of common contract problems includes work “not clearly stated and described” and a bid “not figured out carefully and/or completely.”
• A concealed-conditions clause. Say what the price assumes about what is behind the walls, and that anything else is extra work by change order, priced the way Change Orders: Price Them, Write Them, Get Them Signed describes.
• Allowances for what the owner has not chosen.

Allowances: how they work and how they go wrong

The CSLB describes allowances as “specific dollar amounts that are set aside for certain materials, finishes, fixtures, and other items that have not been selected or decided upon by the Owner.” In its sample, the allowances include all overhead and profit plus all applicable sales taxes, and if the final cost of an item is more or less than the allowance, the contract price goes up or down “by a written change order from the Contractor.”

Say a remodeler bids a hall bath at a fixed price that includes a $1,200 tile allowance, written the CSLB way, so the figure includes markup and tax. The homeowner falls for a tile that comes to $1,850 on the same basis. The contract price goes up $650, by a written change order signed before the tile is ordered. Had she chosen a $1,000 tile, the price would have gone down $200.

Allowances go wrong in a few predictable ways:

• Set low to win the bid. A tile allowance that buys only the cheapest tile in the showroom makes your price look good and guarantees an argument later. Set each allowance at what this homeowner is likely to pick, and show her an example of what it buys.
• Unclear about what is inside. Material only, or material and installation? Markup and tax inside the figure, as in the CSLB sample, or added on the overage? Write it down; either way can work if the contract says which.
• No deadline. A fixture chosen three weeks late holds up the schedule. List the selection date for each allowance item.
• No running total. Keep one sheet of every allowance, the actual cost and the difference, and give the homeowner a copy with each change order, so the final bill is no surprise.

Cost-plus: the owner carries the cost, you open the books

In a cost-plus contract the owner pays the actual cost of the work plus your fee. AIA says the fee “can be a lump sum, a percentage of the cost of the work, or determined in another way” and “generally covers overhead and other costs not compensated directly.” AIA notes it is “most often used for large or complex projects”; for a remodel, it fits a job whose scope cannot be known until walls come down, such as a fire or water repair or a gut of an old house.

The price of moving the risk to the owner is transparency. AIA warns that a cost-plus contract “will likely require you to keep detailed records, substantiate all costs, and give the owner and the owner’s auditors access to your accounts throughout the project,” and that contractors typically prepare a control estimate that is updated with each payment application. If you do not already cost every job, Job Costing is the place to start. The contract should define:

• What counts as cost: materials at invoice, your crew at stated hourly rates, subcontractors at invoice, permits, equipment rental, disposal.
• What the fee covers: your overhead and profit, and whether supervision and the office are in the fee or billed as cost.
• What the owner sees with each bill: receipts, time records, the updated estimate.

On the fee itself, remember that a percentage of cost is a markup, not a margin. A 20% fee on $60,000 of cost is $12,000, but that is 16.7% of the $72,000 the owner pays; Markup vs. Margin has the conversion. A percentage fee also grows when costs grow, which some owners read as a reason for you to spend more. A fixed-dollar fee avoids that argument, at the price of a fee that does not grow if the job does, so tie it to the scope and adjust it by change order.

The guaranteed maximum price: the middle road

AIA describes a guaranteed maximum price, or GMP, as “a cost-plus arrangement in which you guarantee that the contract sum will not exceed a specified amount,” plus any additions or deductions the contract allows. You keep open books, as on cost-plus, but “the contractor assumes the risk of costs over the GMP.” AIA adds that many GMP contracts include “a bonus provision or a shared savings provision” if the job comes in under. Its A102 form is the cost-plus-fee agreement with a GMP; A103 is the one without.

Say a remodeler agrees to a GMP of $90,000, fee included, with savings split evenly. If cost plus fee comes to $84,000, the owner pays that plus half the $6,000 savings as the shared-savings bonus, $87,000 in all. If it comes to $95,000 with no change orders, the owner pays $90,000 and the $5,000 over is the remodeler’s. A GMP suits an owner who wants a ceiling and a remodeler confident enough in the estimate to give one.

Choosing

Whichever you choose, the state rules for home improvement contracts still apply, and they differ; What a Home Improvement Contract Must Say covers four states’ requirements, and California, for one, caps the down payment on a home improvement contract at $1,000 or 10% of the contract price, whichever is less. Check how your state’s law treats a contract without a fixed price before you write one. Payment timing is its own decision; Getting Paid Faster covers draws tied to milestones. More for remodelers is on our remodeling page.

General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.