The short answer: A fixed-price contract sets one price for a defined scope, so the contractor carries most of the risk if the job costs more than planned. Time and materials (T&M) and cost-plus contracts bill what the work actually costs, plus hourly rates, markup, or a fee, so you carry most of that risk. Fixed price usually fits a well-defined remodel. Cost-based pricing can fit work where the scope can’t be known up front, especially with a cap on the total. In California, a home improvement contract over $500 still has to state a contract price and a payment schedule in dollars and cents, whichever pricing method you use.
Here’s a situation homeowners run into all the time. You collect three bids. Two show a single number. The third says “time and materials, estimated at” a figure that’s lower than the others. Is the lower one a deal, or a guess?
The answer depends less on the number and more on who pays when the job turns out to be bigger than anyone expected. Below: how each contract type works, who carries the risk, what California law requires no matter which one you sign, and the questions that protect you either way.
What’s the difference between the three contract types?
People use these terms loosely. Some contractors call any cost-based contract “T&M,” and a Fine Homebuilding article on cost-plus treats the two as the same thing. Here’s how they’re usually described:
| Question | Fixed price (lump sum) | Time and materials | Cost-plus |
|---|---|---|---|
| How the price is set | One agreed price for a defined scope | Hourly labor rates plus materials, often with a markup | Actual costs plus a fee (a fixed amount or a percentage) |
| Who carries the risk of overruns | Mostly the contractor | Mostly you | Mostly you, unless there’s a cap |
| What you see | The price and the scope | Hours, rates, and material receipts | Costs, invoices, and the fee |
| Common fit | Well-defined remodels with plans and selections made | Small repairs or work you can’t define until it’s opened up | Complex or custom work where the scope will evolve |
How does a fixed-price contract work?
You agree on a scope and a price. If the crew takes longer than planned or a material costs more than the contractor expected, that’s generally the contractor’s problem, not yours.
That predictability is why fixed price is the most common choice for kitchens, bathrooms, and additions. It also explains why a fixed-price bid can look higher: the contractor is pricing in the risk they’re taking on.
“Fixed” doesn’t mean the price can never change, though. It changes when the scope changes:
- You change your mind. A different tile, a moved outlet, a bigger window.
- Allowances run over. If the bid included $3,000 for light fixtures and you pick $4,500 worth, the difference comes back to you.
- Hidden conditions turn up. Rot under a tub or old wiring behind a wall is often excluded or handled separately.
Each of those should come through a written, signed change order before the work happens. Our guide on what a change order is and how to avoid surprise costs explains what California requires and how to keep them small.
The catch with fixed price: it only protects you as well as the scope is written. A vague scope (“remodel bathroom”) leaves room for arguments about what was included.
How does a time and materials contract work?
You pay for the hours worked at agreed rates, plus the materials used. Materials are often billed with a markup to cover the contractor’s time buying, handling, and storing them.
T&M can make sense for small repairs, troubleshooting, or work where nobody can know the scope until the wall or floor is opened. The upside is that you aren’t paying for a risk cushion. The downside is that a slow day, a mistake, or a scope that grows all land on your bill.
If you’re offered T&M, get these in writing:
- The hourly rate for each worker or trade
- The markup on materials, if any
- Any minimum charges, trip fees, or equipment charges
- How hours will be recorded (daily logs or time sheets you can see)
- A not-to-exceed amount, so the job stops for your approval before it passes a set figure
How does a cost-plus contract work?
You pay the actual cost of labor, materials, and subcontractors, plus a fee for the contractor’s overhead and profit. The fee might be a fixed dollar amount or a percentage of cost.
Cost-plus gives you an open view of where the money goes, which some homeowners like on a custom or high-end project. But it shifts the risk of overruns to you. The author of that Fine Homebuilding piece points out that there’s no industry standard for what the “plus” covers, and notes that a fee based on a percentage of cost is rarely used because it rewards higher spending.
A common middle ground is cost-plus with a guaranteed maximum price (often called a GMP or cap). You pay actual costs plus the fee, but not more than the cap unless a signed change order raises it. Some contracts share any savings below the cap.
If you’re offered cost-plus, ask:
- What exactly counts as a “cost,” and what’s covered by the fee?
- Is the fee fixed or a percentage?
- Is there a cap, and what moves it?
- Will you see the actual invoices and receipts?
- How will general conditions (supervision, cleanup, dumpsters, portable toilet) be billed?
What does California law require, no matter which type I choose?
For home improvement work on a home, California’s Business and Professions Code section 7159 sets the rules for contracts over $500. A few of them matter a lot here:
| Requirement | What it means for you |
|---|---|
| A “Contract Price” stated in dollars and cents | The contract has to show a price, not just a rate sheet |
| Down payment of no more than $1,000 or 10 percent of the price, whichever is less | A large deposit up front is a warning sign |
| A “Schedule of Progress Payments” in dollars and cents, tied to specific work | You pay as work is done, in amounts you can see ahead of time |
| The statute’s required notice: “It is against the law for a contractor to collect payment for work not yet completed, or for materials not yet delivered” | Payments shouldn’t run ahead of the job |
| Changes made by written, signed change order before the work | The price only moves with paperwork you’ve signed |
So how does a T&M or cost-plus home improvement contract meet the “Contract Price” requirement? That’s a fair question to ask before you sign. A stated price with a cap or not-to-exceed amount, plus a payment schedule tied to real milestones, is one way contractors try to address it. If you’re unsure how a contract handles it, have a construction attorney review it before you sign. (This article isn’t legal advice.)
For the full list of what a California remodeling contract must include, see our guide to what a home remodeling contract should include in California.
Which contract fits my project?
| Your situation | What usually fits |
|---|---|
| Plans drawn, finishes selected, scope well defined | Fixed price, with clear allowances and exclusions |
| Small repair, or the problem can’t be seen until it’s opened up | T&M with a not-to-exceed amount |
| Custom or evolving design, and you want to see every cost | Cost-plus with a cap |
| Older home with likely hidden conditions | Fixed price for the known work, plus agreed unit prices or a T&M allowance for what’s found |
| Tight budget with no room for surprises | Fixed price with a detailed scope and a contingency you hold yourself |
The mixed approach in the fourth row is common and practical. You get a firm price for what everyone can see, and a clear, pre-agreed way to price what nobody can see yet.
What can I handle myself, and when should I get help?
You can usually handle: comparing how each bid is priced, asking the questions above, checking the down payment and payment schedule against the $1,000 or 10 percent limit, and reading the allowances and exclusions line by line.
Get help when: a contract has no clear price or cap, the payment schedule asks for money ahead of the work, the terms for “cost” or the fee are vague, or the dollar amount is large enough that an attorney’s review is cheap insurance.
Frequently asked questions
Is a fixed-price contract better for homeowners? For a well-defined remodel, it usually gives the most predictable budget, because the contractor carries most of the cost risk. It only works well with a clear scope, realistic allowances, and written change orders.
What is the difference between time and materials and cost-plus? T&M bills hourly labor rates plus materials, often with a markup. Cost-plus bills actual costs plus a separate fee. Many people use the terms interchangeably, so ask how a specific contract defines them.
What is a guaranteed maximum price? A cap on a cost-plus contract. You pay actual costs plus the fee, but not more than the cap unless a signed change order raises it.
Can a California contractor use a time and materials contract for a home remodel? California’s home improvement contract law requires a stated contract price and a payment schedule in dollars and cents. Ask how the contract meets those requirements, and have an attorney review it if you’re unsure.
How much can a contractor ask for up front in California? For home improvement contracts, the down payment can’t be more than $1,000 or 10 percent of the contract price, whichever is less.
Want a price you can actually read?
Whichever contract type you choose, the real protection is clarity: a written scope, a clear price, honest allowances, and a payment schedule that follows the work.
De Sisto Construction, Inc. is a California licensed general contractor (CSLB #803545) serving greater Los Angeles and Orange County since 2001. We put together step-by-step outlines and line-item project costing, so you can see what’s included, what’s an allowance, and where every dollar goes before you sign. Take a look at our residential remodeling services, including kitchens, bathrooms, room additions, and ADUs.
Give us a call at 562-425-1050 or email us at info@desistogc.com (dcidirect.net)