Cost+ always in the case of a highend custom home. Think from the other side of the coin. With cost plus if you have a $10k trim budget and only use $2k you keep the money, with fixed cost if you have a $10k budget and the builder only uses $2k - you loose it.

We're currently building with cost plus. You do save on some areas but the key thing is that you should have everything spec'd out before starting. GC's will lowball you on stuff like the kitchen cabinets, plumbing and lighting fixtures, knowing you'll go over when it comes to decision time, raising their profit.
Also the builder has no incentive to save money you have to do it yourself. In other words if you want to be hands on, cost plus may work for you, if you want to be hands off, go with fixed contract.

I like to use a Cost of the Work contract with a Guaranteed Maximum Price and a Shared Savings. This is pretty much the standard for large commercial projects since the early 70's. Each trade is bid competitively and the owner chooses the sub and if that price is greater than the lowest one, the GMP is increased by the difference. The owner has cost protection and a chance to save money and the builder has a financial incentive to buy the job out below the GMP. Splitting the savings increases the builder's profit with little effort and no additional cost. I've never found a downside to it. It is usually a good idea to have an architect involved unless the builder is sophisticated enough to administrate the contract.

I would avoid any allowances in fixed price contracts or any Cost of the Work contracts with no GMP because you have no cost protection against excessive markups by sub contractors.

I'm just a simple guy building or renoing only 1-3 projects a year. (Off this year for medical reasons.) When I can't comfortably spec, I like either fixed cost plus extras or a straight management contract.

For the unscrupulous builder, there are many opportunities for profit at the buyer/owner's expense. So my overriding advice is: only work with a builder who gives you confidence in his integrity. And if you need further reassurance, have an outside pro to double check the work as it procedes.

I would never do a fixed price - too much incentive for the builder to cut corners to save himself $$$. We are paying our contracter a straight fee for managing the project - there is no incentive for him to cut corners.

There are pros and cons to both sides. And whichever you choose, plan on spending a lot more time managing your house build than you thought, unless you have the budget to pay an architect or foreman to oversee for you.

800K is a nice home (our budget is $700K for the house only), but not quite in the realm of hiring an architect to oversee the whole project. Spend extra time and money with your architect up front to get everything spec'd out as best you can. Don't use allowances for anything. Pick out tile, appliances, everything. Put them in your contract, and then pay for change orders (define change orders and how they're priced in the contract) if you need to change anything.

Find your local AIA office (American Institute of Architects) to buy copies of the types of contracts MightyAnvil mentioned. Even talk with them about which versions might work best for your situation.

I am a contract manager by profession and so I tend to look at this decision from a risk allocation perspective. Several responders have already pointed out that Fixed Price carries a risk to the buyer that the builder will cut corners and try to maximize his profit. The flip side of that coin is that in THIS economy (which the OP referred to specifically) the FP option is not so bad given that (1) prices for materials have been hard to predict lately so the builder bears the risk of high costs, and (2) creditors have been harder to deal with so having a solid price rather than a moving target may make your financing go more smoothly.

I personally do not think that an "unscrupulous" builder should be the benchmark for making your decision. Choose a builder with integrity (check others whose homes he built, etc.) and make it a purely economic decision.

The value of a Fixed Price contract is greatly affected by the degree of project documentation and quality control provided.

If a Builder provides the design documentation consisting of a short form contract, an outline specification, no details or schedules, extensive Allowances and promises to do a "workman-like" job during construction, a Fixed Price contract offers little protection to the Owner.

But if the Owner provides full professional design documentation and construction oversight, a Fixed Price contract can be very beneficial to the Owner.

There's no free lunch. It's a matter of how much risk you are willing or able to take regarding the honesty, ability, and solvency of the Builder. There is always risk when you put someone in a position to chose between their interests and yours no matter how fair you think they might be.

i am in the middle of a 6000 square foot build and have a construction manager who gets a fixed percentage of the cost of all of the subs.

This has worked very well for me. It may not result in the lowest price house, but i think it will result in the highest quality.

he has been good about showing me all the subcontractor bids, and then explaining when it made sense to go with the low cost guy and when it made sense to go with the higher price guy.

Cost plus a Fixed Fee is the best way if speed and/or quality is more important than cost control.