Remodeling bids are full of terms that sound standard but hide real differences in cost and risk. Here is what each number on a bid or invoice actually means.
Licensing, permit, lien and tax rules vary by state and city and change over time. This guide is general information, not legal or tax advice; check with your local building department, state licensing board or a professional for your situation.
Checklist
- A fixed price contract sets one total, while cost-plus reimburses documented costs plus a fee for overhead and profit.
- An allowance is a placeholder amount in the contract for items you have not picked yet; overages are settled by change order, not paid in full again.
- A change order is a written, signed amendment covering the work change, the price change and the schedule change before work happens.
- Deposit rules vary by state: California caps home improvement down payments at $1,000 or 10 percent, whichever is less; Maryland caps them at one third of the contract price.
- Remodelers averaged a 6.3 percent net profit margin in 2024, per NAHB, so big bid gaps usually come from scope and allowances, not extreme markups.
Remodeling bids are written in a language of their own, and the words matter. Two bids that look thousands of dollars apart can describe the same job, and two that look identical can carry very different amounts of risk for you. Learn what each line actually means before you compare totals. The basics below cover most residential bids and invoices.
Fixed Price, Cost-Plus and Time-and-Materials Contracts
Fixed price contract. An agreement to complete a defined job for one predetermined total. Most small and mid-size remodels are quoted this way, and it is the easiest type to compare because the number includes the contractor’s own pricing risk.
Cost-plus contract. You reimburse the contractor’s documented project costs, such as labor, materials and subcontractor bills, plus a fee covering overhead and profit. Owners often choose it when the scope is unclear or they want to start quickly, but the total can come in higher than a fixed price would have been. The contract should spell out which costs count as project costs and how the fee is calculated.
Time-and-materials contract. A close cousin of cost-plus: an hourly or daily rate plus the actual cost of materials. It shifts pricing risk to you, so it fits best on small jobs nobody can estimate.
Scope of work. The written description of everything the contract covers: drawings, specifications, materials and schedule. Anything outside it is a change, which is why vague scope causes most payment fights. What a home improvement contract should say shows how detailed this section needs to be.
Allowances: The Budget Line That Grows
Allowance. A dollar amount built into the contract sum as a placeholder for items not yet selected, such as flooring, tile or light fixtures. Under the AIA’s standard terms, the allowance covers the cost of materials and equipment delivered to the site, including taxes, while labor, installation, overhead and profit are priced separately in the contract.
Selection. The actual item you pick to fill an allowance. Trade groups publish selection worksheets so customers can record their choices, within a maximum allowance, before construction starts.
Allowance reconciliation. The settlement after you buy. If a contract includes a $20,000 flooring allowance and the covered cost comes in at $25,000, the adjustment is a $5,000 increase, not another $25,000 added on top. If the cost is $18,000, you get a $2,000 credit.
Tip
Before signing, read what each allowance covers: materials only, or installation, delivery and handling too. Your agreement may use different terms than industry standards, so the allowance schedule should say exactly what is included.
A low allowance makes a starting bid look attractive. Ask whether the amount would actually buy the finish level you have in mind.
Change Orders and Why They Move the Total
Change order. A written amendment documenting work added, removed or altered, along with the change to the price and the completion date, signed by both parties before work happens. In California, every price or scope change must be made this way. Once signed, it becomes part of the contract.
Unit pricing. Quoting work by a measurable unit, such as a price per square foot of drywall. Unit prices make it easier to price small changes without renegotiating the whole job.
Contract sum. The total contract price, which adjusts through change orders as allowances settle and scope changes. Keep a running list of signed change orders so you always know the current total.
Contingency: How Much to Hold Back
Contingency. Money you set aside for surprises that neither an allowance nor the contract covers. It is not the same thing as an allowance: an allowance is part of the contract sum for specific undecided items, while a contingency is your own cushion for problems nobody saw at bid time. Size it to the age of the house and how much is being opened up.
Deposits, Draws and Progress Payments
Down payment (deposit). Money paid before work starts. State rules cap it in some places. In California, the down payment on a home improvement job is limited to the smaller of $1,000 or 10 percent of the contract price, and special-order materials do not loosen that limit. In Maryland, a contractor cannot take more than one third of the contract price as a deposit and cannot accept any payment until the contract is signed.
Progress payment. A payment tied to completed stages of work, sometimes called a draw. California requires a written payment schedule in the contract and says payments cannot exceed the value of the work already performed.
Punch list. The short list of small items left after the job is substantially complete. Some contract forms let the customer withhold part of the final payment, called retainage, until those items are corrected.
Because unpaid subcontractors and suppliers on some projects can file a claim against your home, it pays to understand mechanic’s liens and lien waivers before the first progress payment.
Overhead, Markup and Profit Explained
Overhead. The contractor’s cost of running the business outside any single job: office, insurance, vehicles, licensing.
Markup. The amount added to costs to cover overhead and profit. Two firms charging the same price can use very different markups, depending on how their finances are set up.
Profit. What the business owner earns after costs and overhead. Remodeling runs thin: NAHB’s cost of doing business study put remodelers’ average net profit margin at 6.3 percent in 2024, the highest since 1996 and up from 3 percent in 2011.
Gross profit margin. Revenue minus direct costs, before overhead. Remodelers averaged 29.9 percent gross margin in 2024, five percentage points above the record low of 24.9 percent in 2021.
Knowing the vocabulary does not guarantee a smooth project, but it lets you ask better questions before you sign. If the numbers start moving without paperwork, when a contractor job goes wrong explains where to go next.
Keep reading
- What a Home Improvement Contract Should Say: The clauses and details a written remodel contract should include, line by line.
- Mechanic’s Liens: How to Avoid Paying Twice: How lien waivers and releases protect your progress payments.
- When a Contractor Job Goes Wrong: What to do when the invoice does not match the contract.
Homeowners ask
Why do two bids for the same remodel differ by thousands of dollars?
Often the difference is not the markup but what each bid assumes: allowance amounts, the finish level, and what the scope of work includes. Compare allowances and line items before comparing totals.
How big should my contingency be?
There is no universal number. The right amount depends on the age of the house, how much wall or floor is being opened up, and how firm your selections are. The point is to hold something back so a surprise does not force a rushed decision.
Can a contractor start work on a handshake and bill me later?
In several states, no. California requires a written contract for home improvement projects over $500, and changes to price or scope must be made with a written, signed change order before the change is made. Rules vary by state, so check with your state licensing board.
Is a cost-plus contract ever a good idea?
It can be, when the scope is genuinely unclear or you want to start quickly. Understand that the total can end up higher than a fixed price would have been, and ask for documentation of every cost billed to you.