Planning guide · updated October 2026
On a large custom home, the contract structure decides who carries the risk when costs move, what you get to see, and how much of your time the budget will take during the build. Fixed price and cost-plus can both work well, and both can go wrong when the questions are not asked up front. This guide explains each structure in plain terms and lists the questions we think every owner on the Central Coast should ask before signing, whichever builder they choose. Questions? Call 805-712-8993.
The short answer
A fixed-price contract sets one price for a defined scope, so the builder carries most of the overrun risk inside that scope. A cost-plus contract pays the actual cost of the work plus a fee, so the owner carries the risk but sees the real costs. A guaranteed maximum sits between them. Neither is right for every home; the right choice depends on how complete the drawings are, how many unknowns the site holds and how involved you want to be. Call 805-712-8993.
1. The contract types
Fixed price, cost-plus and the guaranteed maximum in plain terms
The CSLB’s 2026 CSLB Law Book lists four common types of agreements between a builder and an owner: lump-sum, cost-plus, unit-price and guaranteed-maximum cost. For a custom home, most conversations come down to three of them.
- Fixed price, also called lump sum or stipulated sum. The builder agrees to build what is shown in a listed set of plans and specifications for one contract price. Items not yet chosen are carried as allowances, and the price moves only through written change orders, allowance adjustments or conditions the contract treats as unforeseen.
- Cost-plus, sometimes called cost of the work plus a fee. You pay what the work actually costs (subcontractors, materials, field labor and other items the contract defines as reimbursable) plus the builder’s fee for overhead and profit. The fee can be a fixed amount or calculated on cost; the contract spells out which.
- Cost-plus with a guaranteed maximum price (GMP). Cost-plus with a ceiling. Costs above the ceiling, for work inside the defined scope, are the builder’s to absorb. Some contracts also say how savings under the ceiling are shared.
A unit-price or time-and-materials arrangement sometimes covers one piece of a job, such as rock excavation or off-haul, where the quantity cannot be known until the work is under way. Ask whether any part of your contract is priced that way and how the quantities are measured.
| Question | Fixed price (lump sum) | Cost-plus | Cost-plus with a guaranteed maximum |
|---|---|---|---|
| What you agree to | One contract price for the work shown in the listed plans and specifications | The actual cost of the work, plus the builder’s fee | Actual cost plus fee, up to a ceiling |
| Who carries the risk of costs running over | Mostly the builder, for work inside the defined scope | Mostly the owner | The owner up to the ceiling, the builder above it (for work inside the defined scope) |
| What you see | The price and the schedule of values; usually not the builder’s underlying costs | Invoices, subcontracts and receipts, if the contract gives you access | The same open books as cost-plus |
| What still moves the number | Change orders, allowance overages, excluded items and unforeseen conditions | Everything that moves cost: selections, design changes, market prices, site surprises | Change orders and allowance overages can raise the ceiling |
| Needs before signing | Complete drawings and specifications | A detailed budget, even if drawings are still developing | Drawings far enough along to set a ceiling both sides trust |
| Owner’s effort during the build | Lower: review progress, approve changes | Higher: review costs and reports with each payment | Higher: cost review plus tracking against the ceiling |
General description of common contract structures, not legal advice. The CSLB’s 2026 Law Book names four types of agreements between builder and owner that contractors should know: lump-sum, cost-plus, unit-price and guaranteed-maximum cost. Contract terms vary; the written contract controls.
2. Which fits a larger custom home
What usually decides it on the Central Coast
On a larger home, the choice is less about which structure is cheaper and more about where the uncertainty sits. A fixed price includes the builder’s judgment about risk; a cost-plus contract passes the real costs through, good and bad. These are the factors we see decide it:
- How complete the drawings are. A fixed price is only as firm as the plans and specifications behind it. If the structural, mechanical and finish details are still being drawn, a fixed number either carries a lot of allowances or a lot of cushion. Cost-plus or a guaranteed maximum can let construction planning start while design finishes.
- What the site may hold. Hillside lots, expansive clay in Paso Robles and Templeton, rock, groundwater, long driveways and rural wells and septic all add costs nobody can fully price until the ground is open. Ask how either contract handles them.
- Design review and permit timing. Review boards and coastal rules in places like Montecito, Carmel and the SLO County coast (see our guide to coastal permits) can change a design late in the process. The longer the time between pricing and starting, the more a contract should say about how prices are updated.
- How involved you want to be. Cost-plus works well for owners who want to review invoices and make cost-based decisions as the house goes up. Owners who would rather approve a price and step back often prefer a fixed price.
- What your lender needs. Construction lenders typically ask for a signed contract, plans and specifications, a line-item budget and a schedule before the loan closes; our financing page covers what they ask the builder for. Ask your lender early whether it has a preference.
There is no single right answer for every owner. What matters most is that the contract you sign matches how complete the project really is, and that both sides understand where the remaining risk sits.
3. Questions for a fixed-price contract
Find out exactly what the price buys
- Which documents is the price based on? Ask for the list of plans, revision dates, specifications and reports (soils, structural, energy) incorporated into the contract. If something is not on that list, assume it is not in the price.
- What is excluded? Common gaps are utility connection and impact fees, permit fees, landscaping, pools, window coverings, appliances, low-voltage systems and off-site work. Get exclusions in writing rather than reading them between the lines.
- Which items are allowances, and how was each one set? On a larger home, finishes, fixtures, lighting, appliances, tile and cabinetry are often allowances. Ask whether each amount reflects the finish level you have in mind, and whether it covers installation or only material.
- What happens when a selection costs more, or less, than the allowance? CSLB’s sample contract language adjusts the contract price up or down by written change order when an allowance item comes in over or under. Ask whether overhead and profit are added to an overage, and whether savings come back to you.
- How are change orders priced and approved? Ask how the builder prices added work, whether credits for deleted work are figured the same way, and how quickly you will see a written price and schedule effect before the work proceeds.
- What counts as an unforeseen condition? Rock, unsuitable soil, groundwater and buried utilities are the usual ones. Ask what the price assumes about the ground, what triggers an adjustment and how the extra cost is documented.
- Is there a contingency inside the price? Some fixed prices carry one, some do not. Either is fine as long as you know which.
- How long is the price good for? If permits or design review push the start date, ask whether the price is held, and whether the contract allows for increases in material or subcontractor costs.
- How was the bid checked? The CSLB lists a bid that was not figured carefully or completely among the common problems it sees in home improvement contracts. A very low number on a complex home is worth a line-by-line conversation, not just a signature.
- What does each payment pay for? Ask for a schedule of values that ties each payment to completed work you can see.
4. Questions for a cost-plus contract
Define the cost, the fee and what you get to see
- What is a reimbursable “cost of the work”? The definition matters more than anything else in a cost-plus contract. Ask whether it includes the builder’s project manager and site superintendent, its own crews, equipment, temporary facilities, insurance, permits and cleanup, and which items are covered by the fee instead.
- What is the fee, and what does it cover? Ask whether it is a fixed amount or calculated on cost, whether it changes with change orders, and whether it applies to allowance overages, owner-supplied items or work you hire separately.
- How are subcontractors chosen? Ask how many bids the builder gets for each trade, whether you can see them, and whether you can ask for a particular subcontractor or supplier.
- How are the builder’s own crews billed? If the builder self-performs framing, carpentry or concrete, ask for the labor rates and how hours are tracked.
- What backup comes with each payment request? Invoices, receipts, subcontractor pay applications, time records and lien releases. Ask whether you or your lender can audit the job cost records, and for how long after completion.
- Do discounts, rebates and credits come back to you? Ask how supplier discounts, returned materials and unused allowances are credited.
- How often will you see a budget update? A good cost-plus job reports cost to date and cost to complete regularly, so you can make decisions while there is still time to change course.
- Is there a ceiling or a target? If the contract carries a guaranteed maximum, ask what can raise it, how savings under it are handled and who controls the contingency inside it.
- How is the job closed out? Ask about the final accounting, the final lien releases and when the last payment is due.
5. What California requires either way
The written contract rules that apply to your project
California sets minimum contract rules regardless of how the price is structured, and which rules apply depends on the project. Building a new home and remodeling one fall under different sections of the Business and Professions Code.
| Project | Main California contract rule | What it requires, in short |
|---|---|---|
| New single-family home you will keep at least a year | Business and Professions Code section 7164 | Written contract and written changes signed by both parties; contractor name, address and license number; approximate start and substantial completion dates; legal description of the site; the “Mechanics Lien Warning”; a statement on commercial general liability insurance with a check box; and a notice near the signatures that you can require a performance and payment bond, at a cost the owner may bear |
| Remodel, addition, ADU added to a home, or rebuilding a home lost in a declared disaster | Home improvement contract rules, sections 7151, 7159 and 7159.5 | A “Home Improvement” contract with the contract price including profit, labor and materials; a limit on the down payment; a payment schedule tied to work done, with no payment ahead of the value of work performed or material delivered (unless the contractor posts a qualifying bond); signed change orders before changed work starts; lien release on request after each payment; cancellation notice; and whether subcontractors will be used |
Summarized from the statute text in the CSLB 2026 Law Book (Business and Professions Code sections 7151, 7151.2, 7159, 7159.5 and 7164), read October 17, 2026. Which rule applies depends on the project; ask your attorney or the CSLB if you are unsure.
For a new custom home, Business and Professions Code section 7164 covers the contract. For work on an existing home, the home improvement rules in section 7159 and section 7159.5 apply. That includes rebuilding a home damaged or destroyed in a disaster declared by the Governor or the President, which the definition in section 7151 treats as home improvement; our wildfire rebuild guide covers that path. The home improvement rules also require the contract to state the contract amount, including profit, labor and materials, so even a cost-based remodel contract needs a stated amount and a clear way to adjust it.
The CSLB’s contracts page adds practical advice: describe materials specifically (brand, model, size, color), never sign a blank or partly blank contract, put every change in a written change order that states the price change, and consider having an attorney review the contract before you sign.
6. Payments, draws and liens
Protecting yourself when you pay
Mechanics lien law protects the people who improve your property. On any contract type, an unpaid subcontractor or supplier can record a lien even if you have paid your builder. The CSLB’s homeowner’s guide to preventing mechanics liens sets out the main safeguards:
- Preliminary notices. Subcontractors and suppliers send you a preliminary notice to keep their lien rights. It is not a lien. It can arrive up to 20 days after they start work or deliver materials, so track who has sent one before you release money for their work.
- Conditional and unconditional releases. Before a payment, get signed conditional releases from the people being paid; after it clears, get unconditional releases signed by each of them. The CSLB publishes the statutory lien release forms for progress and final payments. Under the home improvement rules, you may withhold further payments until the releases for the previous payment are furnished; on a new home, ask for the same practice in the contract.
- Joint checks. Paying with a check made out to both the builder and a subcontractor or supplier who sent a preliminary notice is one of the simplest ways to make sure they are paid.
- Notice of completion. Recording a notice of completion with the county recorder within 15 days after the work is complete shortens the time claimants have to record a lien. Without one, they generally have 90 days after completion.
- Lender draws. If a construction lender funds the job, its inspector usually confirms progress before each draw. That checks work in place, not who has been paid, so the release process still matters.
On a cost-plus job, the payment backup and the lien releases usually travel together with each draw. On a fixed-price job, ask for the same releases even though you do not see the underlying invoices.
7. Allowances, selections and changes
Where budgets usually move on larger homes
On the larger homes we build, the gap between the first number and the final cost usually comes from the same three places under either contract type: allowances that did not match the finishes the owner wanted, design changes after pricing, and site conditions. A few habits help:
- Set allowances from real selections. Walk a showroom or two before the contract is signed, so the allowance for tile, plumbing fixtures or lighting reflects what you actually like.
- Agree on a selections schedule. Long-lead items such as windows, custom cabinetry, specialty doors and some appliances need decisions early to avoid delays.
- Price changes before they are built. A signed change order with the price and the schedule effect, every time, keeps the budget honest under either contract.
- Keep one running budget. Ask for a single document that shows the contract amount, approved changes, allowance adjustments and pending items, updated with each payment.
Our custom home cost guide explains what drives the budget on a Central Coast custom home, and our build timeline guide covers the phases from design through final.
8. The side-by-side checklist
Questions to bring to every builder meeting
Bring this list to each builder you are considering, and ask for the answers in writing as part of the proposal or contract.
| Ask about | Fixed price | Cost-plus or guaranteed maximum |
|---|---|---|
| The documents | Which plan set, revision date and specifications is the price based on? | Which budget, and how detailed is it? |
| Allowances | Which items, how each amount was set, and how overages and savings are handled | Same, plus whether the fee applies to overages |
| Exclusions | What is not in the price, in writing | What is not a reimbursable cost |
| Changes | How change orders are priced and approved before work | How changes affect the fee and the ceiling |
| Site conditions | What happens if the excavation finds rock, clay or water | How those costs are tracked and reported |
| Contingency | Is there one inside the price? | Who controls it, and who keeps what is left? |
| Payments | The schedule of values and what must be complete before each payment | What backup comes with each payment request |
| Lien protection | Preliminary notices, conditional and unconditional releases with each payment, joint checks where needed, and a recorded notice of completion | |
Whatever the structure, check the builder’s license, bond and workers’ compensation status with the CSLB license check. The CSLB’s license bond fact sheet explains what a contractor license bond does and does not cover, and its construction checklist and Terms of Agreement consumer guide are useful to read before you sign. Its Contracting for Success guide shows how a well-built contract describes the work.
How we help
Pricing a custom home with us
- A price from the plans. We price custom homes from the plan set, line by line, with allowances for selections you have not made yet, and we show you which parts of the number are firm and which are still allowances.
- Straight answers to these questions. We are glad to walk through fixed-price and cost-based structures with you and your attorney or lender, and put the answers in writing.
- Plans, if you need them. Sister studio Harrod Drafting & Design can draw the home or finish construction documents, so the contract is built on complete drawings. If you are working with an architect, we build to their plans.
- Outside, too. Sister company Paso Robles Landscaping handles landscape and hardscape, which is often a separate contract or an allowance on a custom home.
Harrod Built is a family general contractor (CSLB #986950) based in Paso Robles, offering general contracting and design-build across San Luis Obispo, Monterey and Santa Barbara counties. Read more about how a job runs with us. Check any contractor with the CSLB license check.
Comparing contracts on a custom home? Send the plan set, even if it is not final, and tell us how you would like the contract to work. We will price it from the plans, walk you through what is fixed and what is still an allowance, and put the answers to the questions on this page in writing. Call 805-712-8993 or contact us.
Sources: Contractors State License Board (CSLB), 2026 Law Book, including Business and Professions Code sections 7151, 7151.2, 7159, 7159.5 and 7164 and the Chapter 3 discussion of contract types; CSLB “What Should I Look for in a Contract and Binding Agreements?” consumer page; CSLB Contracting for Success and Terms of Agreement consumer guide to home improvement contracts; CSLB homeowner’s guide to preventing mechanics liens and conditional and unconditional waiver and release forms; CSLB license bond fact sheet (2025) and construction checklist (2025). All checked October 17, 2026. This guide is general information, not legal advice. Have an attorney review any construction contract before you sign it.
What is the difference between a fixed-price and a cost-plus contract for a custom home?
A fixed-price contract sets one contract price for the work in a listed set of plans and specifications, so the builder carries most of the risk of costs running over inside that scope. A cost-plus contract pays the actual cost of the work plus a fee for the builder’s overhead and profit, so the owner carries that risk but can see the real costs. A guaranteed maximum price adds a ceiling to cost-plus.
Is a cost-plus contract more expensive than a fixed price?
Not by definition. A fixed price includes the builder’s judgment about risk and unknowns, while a cost-plus contract passes actual costs through, whether they come in lower or higher than expected. Which costs less on a given home depends on how complete the drawings are, how many unknowns the site holds and how changes are handled.
What is a guaranteed maximum price contract?
It is a cost-plus contract with a ceiling. You pay the actual cost of the work plus the fee up to the guaranteed maximum, and costs above it for work inside the defined scope are the builder’s responsibility. Change orders and allowance overages can raise the ceiling, so ask what adjusts it and how savings under it are shared.
What does California require in a contract to build a new home?
Under Business and Professions Code section 7164, a contract to build a single-family home the owner will keep for at least a year must be in writing and signed by both parties, with the contractor’s name, address and license number, approximate start and completion dates, a legal description of the site, the Mechanics Lien Warning, an insurance disclosure and a notice that the owner can require a performance and payment bond.
How do I protect myself from mechanics liens when I pay my builder?
Track the preliminary notices you receive from subcontractors and suppliers, get conditional lien releases before each payment and unconditional releases after it, use joint checks where needed, and record a notice of completion when the work is done. The CSLB publishes a homeowner’s guide to preventing mechanics liens and the statutory release forms.
Planning guides
Budget and planning guides
What a custom home costs on the Central Coast
What drives the budget on a custom home here, and how to get a real number from plans.
How long it takes to build a custom home
Design, permits and construction: the phases and what stretches each one.
Build or buy?
Building a custom home versus buying an existing one: time, money, land and what you get.
Financing your build
Construction loans, renovation loans and what a lender asks the builder for.
Buying land to build on in SLO County
Legal lot status, zoning, water, septic, fire, flood and access: what to check before you close.
Building on a hillside lot
Foundations, grading, access and drainage on a sloped Central Coast lot.
Expansive clay soils in Paso Robles and Templeton
What a soils report finds and how clay changes the foundation and site work.
Rebuilding after a wildfire in SLO County
Debris removal, the County permit path, septic, water and fire-resistant construction.
Title 24 energy code for a new home
Solar, battery-ready and electric-ready rules, HERS testing and what the 2025 Energy Code changes.
Owner-builder vs a licensed contractor
What California’s owner-builder exemption allows, the County forms you sign and the employer duties that come with it.
How to check a contractor’s license
Reading the CSLB record line by line: status, classifications, bond, workers’ comp, salespeople and complaints.
Kitchen remodel timeline
The order of work on a kitchen remodel, from design and the permit to cabinets, counters and the final inspection.
How long a bathroom remodel takes
Every step from tear-out to shower glass, with the permits and inspections in between.
Start your project
Comparing contracts for a custom home? Send us the plans.
A few details help us call you back with useful answers about budget, schedule and permits.
805.712.8993michael@harrodbuilt.com
1345 Riverside Ave, Paso Robles, CA 93446
CSLB License #986950
