Cost Plus vs Fixed Price Building Contract: What’s the Difference?
When planning a renovation, extension or new home, choosing the right contract type is one of the most important decisions you’ll make. The two most common options in Australia are a cost plus contract and a fixed price contract, and each has very different implications for your budget, risk and level of flexibility.
Understanding the difference between a cost plus vs fixed price building contract can help you make informed decisions and avoid unexpected costs during your construction project.
What Is a Fixed Price Contract?
A fixed price contract, sometimes referred to as a lump sum contract, sets a single agreed price for the entire construction project before work begins. This price is based on the agreed scope of work, plans, specifications and selections at the time the contract is signed.
With a fixed price contract:
The final price is agreed upfront
The builder carries most of the cost risk
Any changes to the scope of work usually result in variations
Budgeting and finance approvals are more straightforward
Fixed price contracts are often preferred by project owners who want certainty around the total cost of their build. However, this certainty relies on having detailed and accurate documentation and budgeting from the outset.
What Is a Cost Plus Contract?
A cost plus contract works on a different basis. Rather than agreeing to a fixed total amount, the project owner pays the actual materials and labour cost, plus an agreed builder’s profit margin.
Under a cost plus contract:
Costs are charged as they are incurred
The builder’s margin is agreed upfront
The final cost is not known until the project is complete
There is greater transparency throughout the build
Cost plus contracts are commonly used for complex renovations or bespoke homes where it’s difficult to accurately estimate the total cost at the beginning of the project.
Cost Plus vs Fixed Price Construction Contract: Key Differences
When comparing a cost plus vs fixed price construction contract, the main difference is how risk is shared.
A fixed price contract provides greater certainty because the total amount is locked in. This can be appealing for project owners who want predictability and fewer financial surprises. However, flexibility is limited, and changes can lead to additional costs.
A cost plus contract offers flexibility and transparency, allowing the construction project to evolve as work progresses. The trade-off is that the project owner carries more risk, as the final cost depends on actual expenses incurred during the build.
Pros and Cons of a Fixed Price Contract
A fixed price contract is generally suited to projects with a clearly defined scope of work.
Benefits include:
Certainty around the total cost
Reduced risk of budget blowouts
Clear expectations from the outset
Potential drawbacks include:
Limited flexibility once construction starts
Variations can increase the final price
Allowances may be included to cover uncertainty
Pros and Cons of a Cost Plus Contract
A cost plus contract can suit more complex or evolving builds.
Benefits include:
Flexibility to make changes during construction
Transparent materials and labour cost tracking
Better suited to high-end or custom projects
Potential drawbacks include:
Less certainty around the final cost
Greater financial responsibility for the project owner
Requires close monitoring of costs
Which Contract Is Right for Your Build?
Choosing between a cost plus vs fixed price contract depends on how defined your scope is and how much cost certainty you want.
If your plans and specifications are well developed, a fixed price contract provides clarity around the final cost. Cost plus contracts can offer flexibility, but place more financial risk on the client.
At JTB Building, we prioritise detailed upfront estimating so fixed price contracts are accurate, transparent and based on real project data.
Final Thoughts
Understanding the difference between cost plus and fixed price building contracts helps you manage risk and avoid surprises.
JTB Building delivers projects under fixed price contracts, supported by thorough budgeting and cost planning before construction begins. If you’re planning a build on Sydney’s Northern Beaches or North Shore, our team is here to help.
FAQs
What is the main difference between a cost plus contract and a fixed price contract?
A fixed price contract sets the total cost upfront, while a cost plus contract charges actual construction costs plus the builder’s margin as work progresses.
Which contract offers more cost certainty?
A fixed price contract offers greater certainty, as the final price is agreed before construction begins.
Is a cost plus contract more flexible than a fixed price contract?
Yes. Cost plus contracts allow greater flexibility if the scope of work is still evolving during construction.
Can the final cost change under a fixed price contract?
Yes. The final cost can change if variations are made to the agreed scope of work after the contract is signed.
Who carries more financial risk in a cost plus contract?
The project owner carries more risk, as the final cost depends on actual labour, materials and site conditions.
Which contract is commonly used once the scope is clearly defined?
Fixed price contracts are commonly used once plans, specifications and approvals are finalised, providing clarity and confidence before construction begins.