Fixed price or cost plus: which building contract suits a custom home?

How a fixed price contract works

A fixed price contract, often called a lump sum contract, sets one price for an agreed scope of work. The Australian Institute of Architects' guide to types of tender calls it the most common arrangement for houses, with cost certainty for the owner once the price is agreed. It also notes that lenders often insist on a lump sum contract when a loan funds the build.

NSW law shapes how the price is shown. Every contract for work over $20,000 must display the contract price prominently on its first page. Where the contract pays in fixed stages, each stage must be described in plain language and given a set amount or percentage of the price. The law also allows payments as work is done and costs are incurred, as well as a mix of both.

A fixed price can still move under the terms of the contract, most often through variations and allowances. Variations change the scope. NSW contracts require every variation to be agreed in writing and signed by you and the builder. Allowances such as prime cost items and provisional sums are adjusted once the actual cost is known. A prime cost item usually settles when you choose the fixture, while a provisional sum covers work that could not be priced firmly at signing. Our new home selections checklist explains the difference in detail.

How a cost plus contract works

Under cost plus the builder charges what the work actually costs and adds an agreed margin. The Institute's guide explains that the contract value is not known until the work is complete, because the owner pays for materials and labour plus the margin and GST. NSW contracts must carry a warning with an explanation whenever the price may change or is not known.

Each progress claim on a cost plus job must be supported by invoices, receipts or other records. Someone has to check every one of them. The Institute notes that this makes contract administration more time consuming. Lenders may also be reluctant to fund a cost plus build because the final price is uncertain.

Fixed price or cost plus: which suits your custom home?

The fixed price vs cost plus choice usually turns on how much of the house is resolved before work starts. A fully documented design with selections largely made can be priced with confidence, so a fixed price gives you certainty and leaves the pricing risk with the builder. It also suits owners building on a budget agreed with their lender, since lenders often insist on a lump sum.

Cost plus suits a different kind of job. The Institute's guide points to work where the scope cannot be known, such as an existing building with hidden conditions. It also suits jobs where quality matters more than cost and timing. Work can start sooner because there is no tender period, although the risk of the price rising sits with you.

If you are offered cost plus, ask how the margin is calculated and which costs it applies to. You should also ask for an estimate of the total, how invoices will be shown to you and who will check them.

Why the documentation decides the price

A fixed price is only as firm as the drawings and specification behind it. Where details are unresolved, a builder has to cover them with provisional sums or exclusions, which brings back some of the uncertainty a fixed price is meant to remove. Our guide to finding a builder for architect plans explains how tender method and documentation shape the quotes you receive.

How we price a custom home at SHORE

We offer fixed lump-sum pricing with consultant coordination included. Our builders work in the same studio as our architect and interior designers. The concept is priced as it takes shape and the budget is refined as each decision lands.

Before we break ground we lock the program, order long-lead items (materials and fittings with long delivery times) and confirm the contract sum. You know the number before the first truck arrives. To see how pricing fits into the whole project, explore our custom homes in Sydney.