Fixed Price vs. Cost Plus contract - What’s the right option for your new home build or renovation?
There are many factors to consider when undertaking a major home renovation or rebuild – and finding a reliable and trustworthy builder should be at the top of your list. Before we delve into the different cost structures that are offered by builders – Fixed Price and Cost Plus Contracts – it’s worth giving a little background into what’s currently going on in the Australian construction industry.
With several large building companies going under in recent months, it certainly pays to ask lots of questions around cost structures when you’re looking for a builder. Bigger is not necessarily better in the case of selecting a builder, as many of the big construction companies (i.e. volume builders or project home builders) operate in a heavily saturated market driven by low profit margins, heavy discounting, and large volumes. They sign up lots of customers on Fixed Price Contracts, and when the cost of materials and labour rises – and construction periods blow out – these operators are left in a very vulnerable financial position (as are the clients who find themselves with a half-finished home).
MILEHAM, like other truely custom home builders, operate in a slightly different market. As each project is unique, estimates and build costs are calculated for each specific project. Furthermore, we only take on a select number of clients each year to ensure each client is given the attention their project deserves, and that each project gets finished on time and within budget.
Before you sign on the dotted line with a builder, it’s important to take a look at the two main cost structures available, to ensure you know what you’re getting into.
Fixed Price Contract (also known as a Lump Sum Contract)
A Fixed Price Contract, the most common type of contract, is where the builder agrees to complete the project for a fixed dollar amount. This means knowing the exact cost of the project upfront, providing you with more certainty and predictability when budgeting for your new home or renovation.
The builder assumes the risk of any cost overruns, including increases in material or labour costs during the building process. It’s important to note that the majority of banks in Australia will currently only lend money for residential construction projects when a Fixed Price Contract is in place.
What to look out for when entering into a Fixed Price Contract:
Ensure that the contract is comprehensive and covers all aspects of the project. A good, Fixed Price Contract should include details such as the scope of work, materials, fixtures and fittings, the building timeline, and the construction start date (which should ideally be within three months of signing the contract).
Make certain that the contract specifies any potential extra costs or variations. A Fixed Price Contract should provide clarity on what is and isn't included in the contract price. You may see these variable costs outlined as:
Provisional Sums – A rate may be specified for an unknown quantity or task that is only uncovered once construction starts (e.g. a set rate per square meter for excess asbestos removal during demolition)
Prime Costs – These are costs that provide an allowance for a specific quantity of items, but the exact product or brand has not yet been specified or chosen (e.g. for an oven, dishwasher, bath, tapware, light fixtures, etc.)
Verify that the builder's quote is accurate and realistic. The more detailed the construction plans, the more accurate your quote will be. It’s worth getting quotes from multiple builders to ensure pricing is with the market average, and checking builders’ availability and capacity for your project.
Understand the builder's processes for variations. In the building process, variations may arise due to changes in design, or unforeseen circumstances. It's essential to understand the builder's processes for dealing with variations, including how they will be priced and approved by you, and the impact they may have on the building timeline.
Agree on the payment terms of your Fixed Price Contract. A schedule may be set out for stage-based payments, or payments on a monthly base reflecting work completed.
Know your rights under the contract. Make sure that you understand your rights under the contract, including the builder's obligations and your obligations as a homeowner. You should also be aware of any warranties or guarantees offered by the builder. Ensure that your builder is licenced, qualified, and eligible to offer Home Building Compensation Fund Insurance (which is required for all residential construction projects over $20k).
Cost Plus Contract
A Cost Plus Contract is a contract where the builder or contractor is paid for their actual costs of labour and materials, plus a percentage for overhead and profit. In a Cost Plus Contract, the homeowner takes on the majority of risk for cost increases in materials and labour during construction, along with timeline blowouts. The homeowner typically pays for the project in instalments as the work progresses.
What to look out for when entering into a Cost Plus Contract:
Understand the builder's markup – which is the percentage added to the actual cost of labour and materials to cover their overhead and profit. Make sure you understand how the markup is calculated and what it covers.
Minimise cost blowouts by ensuring the builder's estimate is specific and reasonable – especially if the plans are a little vague. Rather than receiving a “ballpark budget”, request as much detail as possible. And before signing, check that the quoted price for materials and labour are in line with the market by comparing them to quotes from different builders.
Confirm that the contract specifies how costs will be tracked, approved, reported, and paid. This includes how often invoices will be submitted, how the homeowner will be notified of any cost overruns, and how variations will be priced and the impact they may have on the building timeline.
Establish the time involved for you to actively manage approvals, costs, and paperwork during the project. While some may opt for the Cost Plus approach with a view to saving money, the hours needed to actively manage the project and the value of your time should be factored in.
Determine how you will be protected if something goes wrong. Will you be covered under the builder’s insurance? Or, if you’re engaging or paying suppliers directly, you may be responsible for checking each party has the relevant warranties and cover.
Which to Choose?
Ultimately, the decision between a Fixed Price and a Cost Plus Contract comes down to your personal preference, the type of project, and your financial goals.
If you need more flexibility, are comfortable taking on more risk, love spreadsheets, and want to be actively involved in managing your project, a Cost Plus Contract may be worth discussing with your builder.
Need to borrow money for your project or prefer the builder to bare the risk and be accountable to deliver on time and within budget – then a Fixed Price Contract is going to be more suitable. It provides peace of mind and a much clearer indication upfront of what will be delivered for the agreed costs.
Related Articles:
How to set a realistic home renovation budget.
Completing a home renovation on time, on budget, at a high quality – can it be done?
MILEHAM provides detailed Fixed Price Contracts to ensure greater transparency and dependability for our clients and their projects. Building Quotes are valid for 30 days and, once approved with a deposit paid, construction begins within three months.
If you’d like a quote on the design and/or build of your project, you can book your Consultation using the below link.
