The core difference in one line
Fixed-price: you agree on one number for a defined scope; if the build costs the contractor more than expected, that's their problem. Cost-plus: you pay the actual cost of labor and materials plus an agreed fee (a percentage or flat amount); if costs run high, that's your problem — but you also see every receipt and don't overpay for padding.
Side by side
| Factor | Fixed-price (lump-sum) | Cost-plus |
|---|---|---|
| Who carries overrun risk | The contractor | You, the homeowner |
| Budget certainty | High — you know the number up front | Lower — the final total isn't known until the end |
| Cost transparency | Lower — you see the total, not the markup | High — actual costs are documented |
| Contingency handling | Built into the price (you may pay for risk that doesn't occur) | You pay only what's actually spent |
| Best when | Scope is well-defined; you value predictability; you're financing to a fixed budget | Scope is uncertain (older homes, unknown site conditions); you trust the builder and want to see the numbers |
| Main risk to watch | Underbid scope that returns as change orders — read every exclusion | An open-ended fee with no cap; costs that drift without oversight |
A common middle path is a cost-plus contract with a guaranteed maximum price (GMP) — you get cost transparency, but the total can't exceed a ceiling. If a contractor offers cost-plus, asking whether they'll add a GMP is a reasonable and revealing request.
The rules that apply no matter which you sign
California law protects homeowners on both contract types, and these are worth knowing before you sign anything:
- Down payment is capped. For a home-improvement contract, the down payment can't exceed $1,000 or 10% of the contract price, whichever is less — with no exception for special-order materials. A contractor demanding more is violating state law.
- Payments can't outrun the work. After the down payment, payments can't exceed the value of work actually performed and materials delivered. Progress payments are tied to milestones — you should never be paid far ahead of what's on the ground.
- It must be in writing. Any home-improvement project over $500 requires a written contract, and every change must be a written change order — legible, clear, and stating your cancellation rights.
- Detail is required. The contract must describe the materials and work specifically, with a written payment schedule. Vague scope is both a red flag and, at this level of detail, non-compliant.
These come from the California Contractors State License Board, and they're the same protections regardless of whether your ADU runs fixed-price or cost-plus. Violations can carry CSLB citations and penalties — which is why a contractor's willingness to follow them is itself a signal.
Before you sign — either contract type
- Confirm the down payment is legal — $1,000 or 10% of the price, whichever is less. This is the fastest contractor red flag to check.
- Get the payment schedule in writing — tied to milestones, never far ahead of the work.
- Fixed-price? Hunt the exclusions — a low lump sum with a thin scope becomes change orders. Run the proposals through our bid comparator.
- Cost-plus? Get the fee and a cap in writing — the percentage or flat fee, plus a guaranteed maximum price if you can negotiate one.
- Verify the license and the written change-order process — both belong in our red-flags checklist.
- This is general information, not legal advice — for a specific contract, a construction attorney is the right reader.
Sources
- California Contractors State License Board — Home Improvement Contracts (what a contract must include, down-payment limits, payment rules) — accessed July 19, 2026
- CSLB — Home Improvement Contracts Consumer Guide (PDF) — accessed July 19, 2026
Frequently asked questions
Neither universally. Fixed-price suits a well-defined new-construction ADU where you value budget certainty — common when financing to a set amount. Cost-plus suits projects with genuine uncertainty (converting an older structure, unknown site conditions) where you trust the builder and want cost transparency. A cost-plus contract with a guaranteed maximum price captures much of both.
No — a fixed price only protects you for the scope it actually covers. A low lump sum built on a thin scope returns as change orders once work exposes what was left out. That's why comparing exclusions matters more than comparing headline totals; our bid comparator and bid guide are built for exactly this.
For a home-improvement contract, no more than $1,000 or 10% of the contract price, whichever is less — with no exception for special-order materials, per the CSLB. A larger demand is a violation of state law and a serious red flag, regardless of contract type.