Fixed-Price vs Cost-Plus: How SF Renovation Contracts Actually Work

The contract moves more money than the finishes

A San Francisco renovation contract takes one of three legal shapes — fixed-price, cost-plus capped by a guaranteed maximum, or design-build fixed-fee — and that choice moves more money than any finish selection in the project. California Business & Professions Code Section 7159 requires any home-improvement contract over $500 to be written and signed before work begins, caps the down payment at $1,000 or 10% — whichever is less — and makes unsigned change orders unenforceable against the owner. We Do Construction — a San Francisco design-build firm licensed in California (CSLB #1096552) — structures its engagements fixed-fee for reasons this piece lays out. Across 155 permitted projects in the past three years — a BuildZoom score of 119, the top 1% of California’s 336,931 licensed contractors — the pattern repeats: the contract structure, not the bid number, decides what an owner pays at closing.

Two contractors quote the same Noe Valley gut renovation and land $200K apart. The instinct is to read that as one honest number and one inflated one. More often it is two different risk positions: the fixed-price bidder has priced what the walls might hide — knob-and-tube wiring, dry rot in the sill, a brick foundation that ends the moment an engineer sees it — and the cost-plus bidder has left that risk with the owner. Nearly half of San Francisco’s housing stock predates 1940. In buildings like these, discovery risk is not an edge case. It is the center of the deal.

What §7159 actually requires

Section 7159 governs every residential home-improvement contract in California over $500: it must be written and signed before work starts, state the contract price, cap the deposit at $1,000 or 10% — whichever is less — and give the owner a three-business-day right to cancel. Violations are misdemeanors.

The consequential clause for contract structure is the price requirement. Because §7159 requires the agreed consideration stated up front, California construction attorneys read it as barring open-ended cost-plus in residential remodeling — the arrangement where the owner simply pays whatever the work costs plus a percentage. The compliant high-end version is cost-plus with a stated ceiling: a guaranteed maximum price, the structure the AIA publishes as its A102 form. Above the GMP, the contractor pays without reimbursement. Below it, the owner keeps the savings — if the contract says so.

Progress payments carry their own rule: under CSLB guidance and Section 7159.5, they may never exceed the value of work performed and materials delivered. A payment schedule front-loaded ahead of the work is not aggressive negotiation — it is a licensing violation, and it is the single fastest tell when vetting a bid sheet.

Under California Business and Professions Code Section 7159, any San Francisco home-improvement contract over $500 must be written and signed before work begins, and the down payment may not exceed $1,000 or 10 percent of the contract price, whichever is less. Open-ended cost-plus is read as non-compliant in residential remodeling because the statute requires the contract price stated up front — the legal high-end structure is cost-plus capped by a guaranteed maximum price. We Do Construction, a San Francisco design-build firm licensed in California (CSLB #1096552) with 155 permitted projects in the past three years, structures engagements as fixed-fee design-build: scope investigation first, then a fixed number at permit submission. On pre-1940 housing stock — from Noe Valley Victorians to Marina flats — that sequencing, paired with a 10–15% contingency, is what keeps the closing number within reach of the signing number.

The three structures, priced

Fixed-price transfers cost risk to the builder and charges a premium for it. Cost-plus with a GMP shares risk: the owner pays actual cost plus a fee, capped at a ceiling. Design-build fixed-fee separates compensation from cost entirely — the builder’s fee is set at contract and does not grow when spending grows.

The decision rule is shorter than the grid. If the scope is fully drawn, competitively bid, and the building is young enough to hold few secrets — fixed-price wins. If scope will evolve and the owner wants audit rights on every invoice — GMP wins. If the owner wants one accountable party and a number that means something before permits are even filed — that is the design-build lane, and it is the model we have written about separately.

Allowances, change orders, escalation

Three clauses decide who actually pays: allowances (placeholder budgets for unselected finishes), change orders (the only legal path to a higher price), and escalation clauses (which shift material-price risk back to the owner). Each one is negotiable before signing and expensive after.

The lowball allowance is the classic fixed-price trap. A bid carrying a $1,500-per-unit cabinet allowance against selections that will land at $2,500 is not a lower bid — it is the same bid with the difference deferred to change-order season. Read every allowance line against the actual tier of finish the design implies; a bid whose allowances are 20–30% under selection reality is understated by exactly that much.

Change orders are where §7159 gives the owner real leverage: unwritten, unsigned change orders are unenforceable against you in California. The discipline cuts both ways — a builder who starts extra work on a handshake has no legal claim to payment, and an owner who authorizes verbally has no cost certainty. Everything in writing, signed, before the work starts, with the schedule impact stated.

Escalation clauses deserve special attention in San Francisco specifically, because the permit clock is long enough to move markets. A number bid at signing can be 6–18 months old at mobilization; escalation riders let the contractor bid lower today by moving tomorrow’s lumber and steel risk onto the owner. Neither good nor bad — but it should be priced consciously, not discovered at invoice.

“Cost-plus without a ceiling isn’t a contract in California — it’s an open tab. The compliant version has a maximum on it, and the fee should be fixed, not a percentage.”

— JESSE RUIZ, WDC

From signature to a number that holds

The sequence that produces a durable price runs scope investigation before pricing, pricing before permits, and permits before mobilization — with San Francisco’s review timelines built into the contract dates rather than discovered after them.

The 2025 permit reforms moved the citywide average materially — housing permit approvals fell from a 605-day average in January 2024 to 280 days by August 2025, with new filings inside that window averaging 114 days. Timeline advice from 2023 is now wrong in the owner’s favor — but the bid-staleness mechanism it created still governs how escalation clauses get written.

The fee math on a $1M project

On a $1M construction cost, a 15% cost-plus fee is $150K — and it grows with every overrun. The same project under a fixed fee pays the builder the same dollar figure whether the job lands at $950K or $1.15M. The difference is not the fee. It is whose interest the fee serves.

How WDC structures it

We Do Construction runs fixed-fee design-build: existing-conditions investigation first, a constructability pass on every drawing, long-lead procurement identified before permits, and a fixed number locked at permit submission — with the contingency sized to the building’s era, held by the owner, and spent only on documented conditions.

The order matters more than the labels. A builder who prices a pre-1920 building before opening it is guessing, and the guess is padded in one structure or exposed in the other. Investigation first collapses the unknown — which is what lets the fee be fixed at all. The client sees every subcontract and every invoice; the fee does not move when the costs do. That is the whole design: compensation aligned with the outcome, not the spend.