Fixed price or cost plus: which contract

A fixed-price contract states a contract sum. It is the default for residential work and it is the right choice for most people. What it is not is a guarantee that the final invoice matches the contract sum.

The three things that move a fixed price

Provisional sums. An allowance for work that cannot be priced exactly at signing — most often site costs, because nobody knows what is under the ground until they dig. If the real cost exceeds the allowance, you pay the difference. Ask which items are provisional and how the allowance was set.

Prime cost items. An allowance for a product not yet selected — tapware, appliances, tiles. Same mechanism: choose above the allowance and you pay the difference.

Variations. Any change to the scope, whether you asked for it or the site forced it. Variations should be priced and signed before the work happens. Where they are not, disputes follow.

Cost plus

You pay the actual cost of the work plus an agreed margin. It transfers risk from the builder to you, and in exchange you do not pay the contingency a builder prices into a fixed sum. It suits complex renovations and difficult sites where the unknowns are genuinely unknowable, and it requires a builder you trust and open-book reporting you will actually read.

Some states restrict or condition cost-plus contracts for residential work. Check with your regulator before assuming it is available.

What to do before you sign either

Have it reviewed by someone whose job is contracts, not construction. A building-specialist solicitor reading your contract costs a fraction of one variation, and it is the cheapest risk reduction available on a project this size.

What a fixed price is actually fixing

It fixes the price of the work described in the contract documents, under the conditions the contract assumes. It does not fix the price of work that is not described, or of conditions that turn out differently. That is not a loophole — it is what the word means in a construction contract, and it is why the scope documents matter more than the number on the front page.

The practical consequence: the quality of a fixed price is the quality of the documentation behind it. A fixed price against a fully documented set of plans, a specification schedule and a soil classification is close to final. The same words against a concept sketch and a standard allowance are not.

How builders price risk into a fixed sum

A builder carrying the risk of the unknown has to price for it. On a well-documented job with few unknowns that margin is modest. On a renovation where nobody can see behind the walls, a builder either prices a large contingency into the fixed sum or declines to offer one. This is the honest reason cost plus exists, and the reason a fixed price on a genuinely unpredictable job can end up dearer than cost plus on the same job.

Choosing between them

Ask how much of your scope is genuinely unknown. New build on a cleared, classified site: little is unknown, and a fixed price is usually the right instrument. Renovation of an older house, or a site with access or ground uncertainty: more is unknown, and a fixed price either carries a large risk margin or will not survive contact with the job.

A reasonable middle path is a fixed price for the documented work with clearly named provisional sums for the genuinely unknown parts, rather than pretending the whole job is one or the other.

If you go cost plus

Agree what "cost" includes before you start — whether the margin applies to everything, how the builder's own labour and supervision are charged, what documentation you receive and how often, and whether there is a not-to-exceed figure. Open-book only works if you read the book. See variations and what is in a building contract.