What is a fixed-price vs time-and-materials contract?

Choosing the contract type is one of the most important decisions in a residential remodel because it determines who absorbs cost overruns and who owns the productivity risk.

Fixed-price (lump-sum) contract:

• Single total price for the entire defined scope.
• Contractor absorbs overruns on labor, materials, and subs.
• Change orders increase price for approved scope additions.
• Contractor incentive: finish efficiently.
• Homeowner certainty: you know the total cost upfront.
• Typical use: well-defined kitchen, bathroom, or standard addition projects.

Time-and-materials (T&M) contract:

• Labor billed at hourly rates.
• Materials billed at cost plus markup (10-25%).
• Subcontractor costs billed at cost plus markup.
• No price ceiling unless you add a NTE (not-to-exceed) clause.
• Homeowner absorbs overruns.
• Contractor incentive: less pressure to rush.
• Typical use: restoration, discovery-heavy work, small repairs, unclear scope.

Cost-plus contract (hybrid):

• Contractor bills at cost plus a fixed fee (often 10-25% markup).
• Like T&M but more transparent about markup.
• Common on custom homes and larger design-build projects.

Guaranteed maximum price (GMP):

• Cost-plus contract with a cap.
• Contractor absorbs overruns above GMP.
• Homeowner shares savings below GMP.

When each fits:

| Scenario | Best contract type | |---|---| | Standard kitchen remodel | Fixed-price | | Standard bathroom remodel | Fixed-price | | Detached ADU new construction | Fixed-price | | Historic home restoration | T&M or Cost-plus | | Discovery-heavy renovation of 1920s home | T&M with NTE cap | | Custom home | GMP or Cost-plus | | Small repair or punch list | T&M |

Red flags on fixed-price contracts:

• Bid significantly below competitors.
• Vague allowances ("finishes TBD") that balloon.
• Missing structural or mechanical scope.

Red flags on T&M contracts:

• No hourly rate schedule.
• No markup percentage disclosed.
• No NTE cap.
• No weekly progress + cost updates.

Protective clauses for any contract type:

• Specific scope description.
• Allowances clearly stated with dollar amounts.
• Change order procedure in writing.
• Retainage (5-10%).
• Completion date with delay language.
• Warranty on workmanship.
• Dispute resolution procedure.

AskBaily's contract template defaults to fixed-price for standard remodel scopes and switches to cost-plus with GMP for large or unknown-scope projects.