March 31st, 2023
By Sofia Alonso
4 min read
When it comes to selecting a general contractor for your new home construction, renovation, or even smaller home projects, you want to be aware of all your options.
In the world of home construction and renovation, determining the pricing model is one of the most important aspects to a successful project as it can significantly impact the budget and timeline for the project.
There are three primary pricing models used in the industry:
- Time and material
- Cost-plus
- Fixed price
Each of these models has its own set of advantages and disadvantages, and choosing the appropriate pricing model depends on various factors such as the size and complexity of the project and the client’s budget.
That is why, as an expert in the home building industry, we feel it is important to empathize with homeowners' concerns and educate them on their options. Each pricing model has its own set of benefits and drawbacks, and it is essential to understand them thoroughly before making a decision.
By the end of this article, readers will have a better understanding of the three primary pricing models used by general contractors in the home construction and renovation industry, allowing them to make an informed decision that best suits their project needs and preferences.
The Time and Material Contractor Pricing Model
The time and material model is the most basic pricing model used by contractors and tradespeople. With this model, the contractor provides the client with an hourly rate and bills for the time spent working on the project, as well as for the materials used. This model is straightforward and simple, making it ideal for small jobs with a limited scope of work.
Advantages:
- Simple and straightforward process
- Ideal for small jobs with a limited scope of work
- Allows for more flexibility in terms of project changes
Disadvantages:
- Can be challenging to budget for larger or more complex projects
- Contractors may not be motivated to complete the project on time or early
- Quality control can be lacking, requiring the hiring of a general contractor to fill in the gaps
The Cost-Plus Contractor Pricing Model
The cost-plus method is a more controlled pricing model that provides the client with an itemized estimate for the total project, including all materials and labor costs, as well as the contractor’s overhead and profit. This model allows for more accurate budgeting, with estimates typically including allowances for unknown items such as appliances or finishes that have not yet been selected.
Advantages:
- More controlled and accurate budgeting
- Provides a general idea of where the price will land
- Establishes a timeline for when the work should be completed
Disadvantages:
- Change-orders can significantly impact the final cost
- The estimate is not a fixed price
- Can be challenging to compare estimates from different contractor due to varying overhead and profit margins
The Fixed-Price Contractor Pricing Model
The fixed price model provides the client with a flat bottom-line number for the entire project, with all plans, selections, and site considerations taken into account. This pricing model eliminates the risk of going over-budget, allowing clients to customize their spending based on the aspects of the project that matter most to them.
Advantages:
- Eliminates the risk of going over-budget
- Allows clients to customize their spending based on the aspects of the project that matter most to them
- Provides a fixed price that the client can rely on
Disadvantages:
- Requires a full set of plans, site considerations, and all selections to be made before price can be fixed
The Vista House Photographed by ©️ Maxwell MacKenzie
So, Which Contractor Pricing Model Should I Choose?
After reading this article, you now better understand the three primary pricing models used by most general contractors in the home construction and renovation industry, their advantages, and disadvantages.
You also know that choosing the appropriate pricing model depends on various factors such as the size and complexity of the project and the client’s budget.
Now that you know this, you can make an informed decision and choose the pricing model that best suits your needs. As a home builder or contractor, you can empathize with your clients’ concerns and provide expert guidance on the appropriate pricing model for their project.
If you’re planning a home construction or renovation project, the next step is to evaluate your specific needs and budget so that you can choose a builder or contractor that offers the pricing model that works best for you. If you’re a contractor or builder, you can use this knowledge to better serve your clients and help them make an informed decision.
Understanding the different pricing models and their pros and cons is important to the success of your home construction and renovation projects. By choosing the appropriate pricing model, you can avoid unexpected costs or delays and ensure your dream home becomes a reality!
As a custom home design-build firm that offers a unique architect-led approach, we use the fixed price model so that we can guarantee our clients’ custom home is delivered on time and on budget, every time!
At AV Architects + Builders, we design and build modern homes utilizing the Master Builder approach. Our proven turnkey process is what you need for single-point accountability and minimizing all the stress of building a new home. You’ll be guided from start to finish by our team of Master Builders … from helping you find a perfect lot to handing you the keys. Consider us an all-in-one solution.
What’s more, our beautifully designed homes are constructed using the highest quality sustainable materials — making them easy to maintain. Our stress-free Master Builder process allows empty-nesters, busy professionals, and families with small children the feeling of Vacation Style Living™ all year round.
If you’d like to read more before you reach out, here are some additional resources from our Learning Center:
- So you want to build a new home? Read about the three main types of home builders and how to choose the right type for your project.
- Finding land is a daunting task to most buyers when starting the home building process, read teardown lot vs vacant land to understand more about which might be right for your project
- Interested in custom? Read the cost of building a custom home in 2023 to learn more about the four factors that can impact the price
- AV Architects + Builders is a design-build architect-led firm that aims to save our clients time while building a custom home
