Setting up the financial arrangement with your builder prior to commencing is one of the most important steps in the construction process.

Amongst other things, it determines payment structures, accountabilities, costs, insurances and liabilities, as well as predicted timelines. There are typically two financial models used by builders: Fixed Price and Cost Plus. Each has its pros and cons, so choosing the right contract for you will come down to personal preference, your financial arrangements and also what your builder wishes to use.

Put simply, cost-plus arrangements are used when a project's full scope cannot be calculated beforehand, such as a difficult build or when a client hasn’t chosen all their materials or finishes prior to commencing - but they carry a higher risk of budget blowouts. Whereas a fixed-price contract is used when the costs are predictable and the total expected budget can be calculated, therefore mitigating against the risk of unexpected costs.

What Is a Fixed Price Building Contract? 

A fixed-price contract establishes one clear, upfront total cost for a defined building job. It usually includes all known – or expected – costs, such as materials, labour and groundwork, with any changes or additions to the plan having to be subsequently put into writing and agreed upon by you and the builder. Changes might include alterations to the design or changes to the originally selected finishes.

What are the Benefits of a Fixed Price Building Contract?

The benefits of a fixed price contract are that you know upfront what you are paying. Having a total price for the build allows you to plan and budget accordingly, but also means that should material costs or labour expenses rise unexpectedly, the builder must absorb these costs. This means that the builder bears a greater financial risk.

What Is a Cost-Plus Building Contract?

A cost-plus contract charges you for the actual, documented cost of labour and materials, plus an agreed fee or percentage for the builder's profit and overhead, leaving the financial risk with you. In this arrangement you will see the invoices for materials and subcontractors as the work happens and will make staged payments based upon clear outgoings and inclusive of the builder’s margin.

What are the Benefits of a Cost-Plus Building Contract?

The benefits of a cost-plus building contract are that it means there’s transparency in what you are being charged for. When invoicing, the builder should attach copies of invoices for materials and subcontractor expenses so that you can see the actual costs incurred. A cost-plus contract also allows for greater flexibility during the build process, particularly for complex designs or if you are unsure of certain elements prior to starting. The catch is that you have greater financial risk and should costs blowout due to rises in material costs, delays or labour overruns, you have to cover the increases.

When is a Fixed Price Building Contract Preferable?

A fixed-price building contract is preferable for standard builds or renovations with complete, final plans and clear material selections. They are great for new home builds that are more predictable, where the design and finishes are chosen in advance and the overall build is relatively straightforward in the sense of the site being accessible and relatively flat, and the architectural drawings are properly scoped out and finalised.

When is a Cost-Plus Building Contract Preferable?

A cost-plus building contract is best for historic renovations (such as work on a heritage property) for building on difficult, sloping sites, or projects where the full scope is unknown at the start. This might be a large renovation project where issues may be encountered during the process, or for a build that is less predictable due to the complex nature of the design. Cost-plus contracts also suit projects where there are unknowns relating to material selection or potential design modifications. A word of warning though, the majority of cost-plus contracts typically end in the final build cost being higher than anticipated or scoped during project estimates.

Final Thoughts

Choosing which contract type is best for your needs is largely determined by the type of build you’re doing. Fixed-price building contracts offer financial security and are best for non-complex builds where you have pre-selected all the design elements and materials, and the site is simple. On the other hand, should you be unsure of finishes, have the potential for unexpected issues to arise, and have a complex design or site, then a cost-plus contract will give you the flexibility needed to accommodate changes and choices made once building has started. That said, there is an increased financial burden and risk placed upon you and as is the case with most cost-plus contracts – you can expect things to end up costing more than originally anticipated.