Unit Price vs. Lump Sum vs. Cost-Plus Contracts

Lump sum (fixed price)

A lump sum contract is a single, fixed price for a fully defined scope of work. The client knows exactly what they will pay; you commit to delivering the work for that number.

Who carries the risk: you do. If the job costs more than you estimated, you eat the difference. If it costs less, you keep it.

When to use it: when the scope is clear and well-documented and you are confident in your takeoff. Lump sum is the most common structure for residential remodels because homeowners strongly prefer knowing the final number. It only works in your favor when the scope is genuinely locked. A fixed price on a fuzzy scope is how contractors lose money.

The discipline it demands: a tight scope statement and a real contingency for the unknowns you accept. Because you are committing to the number, everything in what to include in a contractor bid, especially exclusions, matters most here.

Unit price

A unit price contract sets a price per unit of work (per square foot of flooring, per linear foot of trench, per cubic yard of concrete) and the final total depends on the actual quantities installed.

Who carries the risk: it is shared. You carry the risk on your *rate* (your per-unit price has to be right), and the client carries the risk on *quantity* (they pay for what actually gets used). If more material is needed than expected, the client pays more, not you.

When to use it: when the type of work is clear but the exact quantity is not: excavation, site work, or repairs where you cannot know how much until you open things up. It is common where measurement, not scope, is the uncertainty. It also makes change management cleaner, since added quantity is priced automatically at the agreed rate.

The discipline it demands: accurate unit rates and honest measurement of installed quantities, since that is what the bill is based on.

Cost-plus

A cost-plus contract bills the client for the actual cost of labor and materials, plus an agreed fee (either a percentage or a fixed amount) for your overhead and profit.

Who carries the risk: the client does. They pay whatever the job actually costs. Your margin is protected because your fee sits on top of real costs.

When to use it: when the scope genuinely cannot be defined up front: extensive custom work, major unknowns, or a homeowner who wants to make decisions as the job unfolds. It is also common on high-end custom builds where quality and changes matter more than a locked price.

The discipline it demands: meticulous, transparent cost tracking. Cost-plus lives or dies on trust: the client is paying your actual costs, so they need to see clean, itemized records. This is where real-time job costing stops being nice-to-have and becomes the contract. Consider a "not-to-exceed" cap to give the homeowner a ceiling, a common middle ground.

How to choose

A quick rule of thumb based on scope clarity:

• Scope fully defined? Lump sum. The client wants a fixed number and you can safely give one.
• Work type clear but quantities uncertain? Unit price. Share the quantity risk fairly.
• Scope genuinely open or evolving? Cost-plus, ideally with a not-to-exceed cap. Do not lump-sum a job you cannot define.

The mistake to avoid is forcing a fixed price onto an undefined job because the client asked for one. That is not confidence. It is you volunteering to absorb every surprise. If the scope is not clear enough for lump sum, say so and propose unit price or cost-plus instead.

A note on the words

Whichever structure you use, be precise about whether you are giving an estimate or a firm price. The two are not the same, and mixing them up is a common source of disputes. See estimate vs. quote vs. bid for that distinction, and how to bid a construction job for the full pricing process underneath any of these structures.