Fixed Price vs Cost Plus Contracts: What's the Difference?
If you're planning to build a home, you've probably come across the terms fixed price contract and cost plus contract.
At first glance, they might sound similar, but they work very differently - and understanding the difference could save you thousands of dollars and a lot of unnecessary stress.
So, which one is right for you? Let's break it down.
What is a Fixed Price Contract?
A fixed price contract is exactly what it sounds like.
Before construction begins, your builder agrees to complete your home for an agreed price based on the plans, specifications and inclusions outlined in your contract. This means you'll know the contract price before construction starts, giving you greater certainty over your budget.
Fixed price contracts are the most common type of building contract used for house and land packages in Queensland.
What are the benefits?
For many buyers, certainty is one of the biggest advantages. A fixed price contract can make it easier to:
Budget with confidence.
Secure finance approval.
Understand your overall build costs.
Avoid unexpected price increases for work included in your contract.
This is one of the reasons fixed price contracts are popular with first home buyers, families and investors.
What isn't always included?
A fixed price doesn't necessarily mean everything is included. Depending on the builder and the package, items such as the following may be excluded or offered as upgrades:
Landscaping
Fencing
Retaining walls
Window furnishings
Air conditioning
Upgraded fixtures and finishes
Every builder is different, so it's important to review the inclusions carefully before signing your contract.
What is a Cost Plus Contract?
A cost plus contract works differently.
Instead of agreeing to one fixed construction price, you pay the actual cost of building the home, plus an agreed builder's margin. This means the final cost isn't known when the contract is signed because it depends on what the project ultimately costs to complete.
When are Cost Plus Contracts used?
Cost plus contracts are generally more common for:
Major renovations
Home extensions
Architecturally designed homes
Projects where the scope of work isn't fully known at the beginning
They're less common for standard house and land packages, where the design, specifications and inclusions are usually agreed before construction begins.
What are the advantages of a Cost Plus Contract?
A cost plus contract can offer greater flexibility if changes are likely during construction or if the project is unique. Because the final cost is based on the actual work completed, it's often better suited to projects where it's difficult to accurately estimate costs from the outset.
Are there any risks?
The biggest consideration is budget certainty. Because the final cost depends on the actual construction costs, it's harder to know exactly what you'll spend before the project is complete.
If material prices increase, unexpected site conditions arise or the project changes significantly, the final cost may be higher than originally anticipated.
That's why cost plus contracts generally suit experienced renovators or clients building highly customised homes rather than buyers looking for a straightforward building process.
Which contract is right for you?
For most people building a new home, particularly through a house and land package, a fixed price contract is often the preferred option because it provides greater certainty around costs. However, every project is different.
If you're building a unique home or undertaking a complex renovation, a cost plus contract may offer the flexibility your project requires.
The right contract depends on your budget, your level of experience and the type of home you're building.
Questions to ask before signing any building contract
No matter which contract you're considering, it's worth asking:
What's included in the contract price?
Are site costs fixed?
Are there any provisional sums or allowances?
What items are considered upgrades?
What happens if I request changes during construction?
What circumstances could result in additional costs?
Understanding the answers before you sign can help you avoid surprises later.
Final Thoughts
Building a home is one of the biggest financial decisions you'll make, so it's important to understand the contract you're signing.
A fixed price contract can provide greater confidence over your budget, while a cost plus contract may suit projects that require more flexibility. Taking the time to understand the differences and asking plenty of questions can help you choose the option that's right for your circumstances.
Whether you're building your first home, upgrading or investing, we'll help you understand your options and guide you through the process with confidence.
If you're thinking about building in South East Queensland, get in touch with the team, we'd love to help you find the right home, the right builder and the right solution for your goals.
Disclaimer: This article contains general information only and is not legal or financial advice. Building contracts vary between builders and projects, and the terms of your contract should always be reviewed carefully. If you're unsure about any aspect of a building contract, we recommend seeking independent legal advice before signing.