Exposing the Truth About Cost-Plus Contracts in Custom Home Building

If you’re building a custom home, cost-plus contracts sound great on the surface, but the deeper you go, the more red flags you’ll find. Builders often promise total transparency, a low markup—maybe 10% or a flat fee—and it all sounds reasonable, even attractive. But stop and think: how can a company run a full-scale, high-quality construction project, manage trades, secure permits, maintain liability insurance, cover rising overhead, and still honor long-term warranties on just a 10% markup or a small flat fee?

The answer is simple. They can’t. Not without cutting serious corners or hiding profit in places you’ll never see until it’s too late.

What Is a Cost-Plus Contract Anyway? Let’s Talk About the Contract That Gets People Burned

In a cost-plus contract, the client agrees to cover the actual costs of construction—materials, labour, permits, etc.—plus a builder’s fee. That fee may be either a fixed dollar amount or a percentage of the overall project cost. The idea is that you only pay for what the builder actually spends, and then compensate them fairly for their time and effort.

In theory, it promotes transparency. In practice, it creates a system with very few checks and balances. Builders get paid more the longer or more expensive the project becomes, and that’s not a good alignment of interests.

Builders Who Charge Too Little Are a Red Flag

Some builders lure clients in with attractive pricing—cost-plus 10% or a fixed fee of $60K–$80K to build a $2 million home. On paper, that sounds like a deal. But in reality, it’s a setup for disaster. Running a construction company involves much more than just hammer and nails. There are salaries, vehicles, equipment, liability, project management, and aftercare. That kind of overhead simply can’t be covered at those prices.

So how are they doing it? Often, they’re padding the “cost” side of the invoice. You won’t see it because it’s baked into supplier relationships, vague line items, or inconsistent markup policies. Or worse, they aren’t making enough to stay in business, which means they likely won’t be around when you need them.

Hidden Costs and Untracked Overages

The biggest issue with cost-plus contracts is the lack of a guaranteed final cost. Most homeowners go in with a budget, but in a cost-plus scenario, the builder has no contractual obligation to stick to it. Delays? You pay. Mistakes? You pay. Rising material costs? You pay. And if the builder’s fee is a percentage of total costs, they’re rewarded for every dollar your project goes over.

Even if the original estimate is accurate, it’s just that—an estimate. If a builder’s systems aren’t dialed in, or if they’re juggling too many jobs, you’re the one who absorbs the fallout.

Fixed Fee vs. Cost-Plus Percentage

Some contractors try to ease concerns by offering a cost-plus contract with a fixed fee rather than a percentage. It seems like a fair compromise. But ask yourself—does that fee reflect the actual complexity and scope of your project? If someone is offering to manage a multi-million dollar home build for a flat $60,000, something doesn’t add up.

That’s usually a sign they’re planning to make their profit elsewhere—whether by reclassifying markups as “costs,” charging inflated supplier rates, or quietly minimizing quality to protect their bottom line.

Cost-Plus Always Starts Slow, Ends High

Here’s another key point most homeowners overlook: cost-plus contracts almost always start slow and seem affordable at the beginning. But as the project unfolds, the final price steadily climbs—often dramatically. Fixed price may appear higher at the outset, but by the time your home is finished, it’s usually the more economical route. That early peace of mind pays off when you’re not staring down surprise costs in the final stretch of your build.

What About Lump Sum Contracts?

Lump sum or fixed-price contracts provide a clear, agreed-upon number up front. The builder is responsible for delivering the project within that budget. Yes, it may come with a slightly higher quote, but it forces accountability. It requires an experienced custom home builder to plan every aspect of the build, line up accurate quotes, and manage resources carefully.

With cost-plus, you’re handing over a blank cheque. With fixed price, you’re demanding proper management. The difference is night and day when the unexpected hits—which it always does in construction.

Guaranteed Maximum Price? Not Quite

To bridge the gap, some builders offer a Guaranteed Maximum Price (GMP). It sounds like a safety net. In reality, GMP clauses often include ambiguous terms like “reasonable unforeseen costs” or “client-requested changes,” which are open to interpretation. Unless every single line item is clearly defined, GMPs can unravel quickly.

So while the term feels reassuring, the protection it offers is often paper-thin.

Who Pays When Mistakes Happen?

Here’s the tough part—under a cost-plus agreement, the homeowner typically pays for the builder’s mistakes. Whether it’s a mismeasured foundation, a scheduling blunder, or a subcontractor who botched their work, the cost lands on your invoice.

When there’s no financial consequence for poor management or sloppy work, there’s no urgency to get it right the first time. And as the client, you’re left footing the bill for mistakes you didn’t make.

Don’t Be Fooled By the Deal

A builder who quotes a suspiciously low fee or markup is setting the stage for a project full of frustration. It’s either a bait-and-switch or a sign they don’t understand the business well enough to operate sustainably. In either case, you’re gambling with your time, money, and peace of mind.

Builders who survive on razor-thin margins often:

• Inflate or conceal markups
• Use subpar materials or unvetted subcontractors
• Disappear before warranty issues surface

A great deal on paper can quickly turn into a financial headache in reality.

Final Thoughts

Cost-plus contracts appeal to homeowners looking for flexibility and transparency, but they rarely deliver either. The risks are real—runaway budgets, unchecked markups, and zero cost certainty. What starts as an open-ended agreement can quickly spiral into a situation where no one is really accountable for cost overruns or project delays.

You deserve more than a contract that rewards inefficiency and vague billing. A reliable custom home builder will give you a clear path forward from the start—with pricing that’s locked in and expectations that are well-managed. That’s why it’s worth considering a builder who offers a true fixed price contract.

At Versa Homes, every custom home build comes with a fixed price and a guaranteed move-in date. That means no financial surprises and no guessing games. Clients know exactly what to expect, from the blueprint to the final walk-through. In addition to our commitment to transparent pricing and reliable timelines, we offer the best custom home warranty coverage in the industry—far exceeding standard offerings. It’s part of a commitment to trust, predictability, and professionalism from start to finish.

Want to build with a company that values honesty, precision, and long-term accountability? Connect with Versa Homes to explore a smarter, safer way to build your custom home. We build custom homes and estates across the Metro Vancouver region, including Vancouver, Langley, Abbotsford and neighbouring communities.