Building Contracts: Fixed Price vs Cost Plus - Which one should you go for?
You may want to build your dream home, or want to renovate your home for a better living, and then you may come across the two types of building contracts: fixed price building contract and cost plus building contract. You may wonder, which one should you choose?
In summary, a fixed price building contract means that the total construction cost has been priced, fixed and cannot be changed unless variations to the scope of works are made. On the other hand, a cost plus building contract means there is no firm limit of the total price and the owner agrees to covering all costs plus a margin.
What is a Fixed Price Building Contract?
Fixed price building contracts are very commonly used across Australia, especially for residential constructions. These building contracts itemise the scope of works with a fixed lump sum amount, which cannot be changed unless there are mutually-agreed variations to the scope of works.
However, it is not uncommon to include provisional allowances into the fixed price contract for some items that the price cannot be determined prior to the construction, such as the excavation works.
What is a Cost Plus Building Contract?
Cost plus building contracts intend to cover the costs of resources used and time expended plus a profit margin. It essentially places no firm limit on the price of the construction, though the estimated total costs would always need to be well communicated prior to the construction.
These contracts are commonly used in those projects that an accurate estimation is not easy to be attained. For residential buildings, cost plus building contracts may apply in renovation projects, where the state of the building may contain many unforeseeable issues and therefore impossible to accurately estimate the cost before the work.
Understandably, no matter the project itself is big or small, trust is a key element between you and your builder. You will generally need to agree on an hourly rate for all involved parties, and a profit margin for the builder to order and arrange all materials. The benefits of this type of contract is that you as the owner will have more control over the expenditure decisions, and the builder will have nearly no risk of costs overrunning.
What are the impacts of applying for a construction loan?
In Australia, for a typical low rate residential construction loan, a fixed price building contract is almost a MUST, with very few exceptions. We have also written in detail how construction loans work so it can put your mind at ease. If you want to have a further chat with our construction specialist mortgage brokers, please contact us for a free consultation.