Q: What type of contract should I ask for when hiring a builder to remodel my home?

A: You’ll have two main types of contracts to choose from: fixed bid and time and materials (sometimes called a cost-plus contract). A fixed bid is exactly what it sounds like—a guaranteed, all-in price for the complete project. A time-and-materials contract will usually provide an estimate, but there is no guarantee the final bill will match that amount; they will simply bill you for all the materials that go into the project, plus an hourly rate for labor and the contractor’s markup.

Each type of contract has its own unique advantages and disadvantages. Let’s look at some of the main points you’ll need to consider when deciding which type to pursue.

Pros and Cons of a Time-and-Materials Contract

A time-and-materials arrangement shifts the risk of cost overruns to the homeowner, which means the contractor can potentially complete the project for less money than estimated. Time-and-material contractors will point out that taking on the risk themselves would require adding a certain amount of contingency to their bid to cover any unforeseen developments.

This is true in theory, but the reality is that time-and-materials contracts tend to encourage less precise estimates because estimating accurately is time consuming and requires ample experience. There is little incentive to put in this extra effort and none for maximizing efficiency. In fact, if your project takes longer and costs more, the time-and-materials contractor will benefit.

Pros and Cons of a Fixed-Bid Contract

The main benefit of a fixed bid is that you will know upfront exactly what your project will cost and can plan accordingly. The biggest immediate drawback is the difficulty of finding a contractor willing to offer a fixed bid. If you send your building plans to several general contractors and ask them to calculate fixed bids, you will, in theory, receive several well-organized bids that you can compare.

But many general contractors refuse to take part in competitive bidding processes, especially when demand is high. Properly checking prices on materials and getting bids from plumbers, electricians, and other busy subcontractors can take dozens of hours. This is wasted time for the contractor if their bid is rejected.

Choose the Contract Type That Best Matches Your Project and Your Personality

When planning a remodel, you’ll face lots of decisions on everything from plumbing fixtures to room layout. Choosing the type of contract may seem like a relatively minor one, but it can have a major impact on your remodeling experience.

For smaller, less complicated projects, a time-and-materials contract may be your only choice and it may even save some money as very little work goes into creating an accurate estimate. However, it could also end up costing you considerably more than the original estimate. It’s not uncommon to hear of projects like kitchen remodels costing 30–50% more and taking twice as long. Choose time-and-materials when you’re eager to get started as soon as possible and cost overruns and schedule creep aren’t major concerns. If you’d rather avoid uncertainty on the price and are willing to take your time making all your design decisions upfront, choose a fixed-bid contract.

Design-Build and Fixed Bidding Work Well Together

Design-build is a remodeling approach wherein you hire a single company to design and complete the construction of your project. This approach lends itself well to the fixed pricing model because the building team is involved with the design process right from the start, providing accurate estimates that will help keep the design within your budget. It’s one of the most reliable ways to integrate accurate cost estimation throughout the entire design process.

A Word About Allowances

There are very few bad licensed contractors out there, but there are a handful who have difficulty with estimates. Some contractors will say they are giving you a fixed bid, then stack it with allowances for major line items, like plumbing and electrical work. If the work ends up costing more than the allowance, you’re on the hook for the overrun. When examining a bid, it’s okay to include allowances for small items, like light fixtures and towel bars, but make sure that the price for all labor is fixed.

Teri McDermott is owner and operations manager of CRD Design Build, a member of the Master Builders Association of King and Snohomish Counties (MBAKS). If you have a home improvement, remodeling, or residential homebuilding question you’d like answered by one of MBAKS’ nearly 2,800 members, write to homework@mbaks.com.