Cost Plus vs Fixed Price Building Contracts in Australia

What it is

A fixed price contract sets one number that the owner pays for the scope of work. The builder carries the risk that materials, labour or productivity could move against the estimate. A cost plus contract reimburses the builder for actual project costs and adds a margin (a fixed fee or a percentage). The owner carries the cost risk.

Both forms are valid common-law contracts, but state legislation restricts when residential cost plus can be used. The starting point in every state is that fixed price (or "lump sum") is the default for domestic work, with cost plus permitted only in narrow circumstances.

How risk sits in each model

Under a fixed price contract the builder absorbs cost escalation in the bid. To stay viable, the builder will load contingency into the price and may push for tighter scope definition before signing. The owner gets price certainty and a stronger position if work runs long, because the contract value does not move unless a written variation is signed.

Cost plus shifts the cost risk to the owner. The builder is paid for verified time and materials at intervals, plus an agreed margin. This suits projects where scope cannot be locked down at the start, such as complex renovations of older houses or heritage work. Owners need strong record-keeping rights, audit clauses and clear margin definitions because the open-ended nature of the contract creates dispute risk.

The two models can be mixed. Many fixed price contracts use provisional sums or prime cost items for line items that cannot be priced at signing, which behave like small cost plus pockets inside a fixed price wrapper.

Statutory limits on residential cost plus

In Victoria, section 13 of the Domestic Building Contracts Act 1995 restricts cost plus contracts. A builder cannot enter a cost plus contract that lacks a fair and reasonable estimate of the total amount the builder is likely to receive. Regulation 10 of the Domestic Building Contracts Regulations 2017 limits the classes of cost plus contracts allowed for domestic work, with thresholds and approval requirements. If the builder breaches section 13 the contract cannot be enforced against the owner, although VCAT may award the builder the cost of the work plus a reasonable profit if it would not be unfair to the owner.

NSW takes a different route. The Home Building Act 1989 does not ban cost plus outright but requires a written contract for work over $5,000 and a full home building contract for work over $20,000. The contract must state the price or the method used to calculate it. Building Commission NSW guidance treats fixed price as best practice and warns owners that cost plus carries no guaranteed final number.

QBCC in Queensland publishes a dedicated cost plus contract template and requires builders to use the right contract type for the work. Similar guidance exists from Building and Energy in WA and CBOS in Tasmania.

What to nail down before signing

For a fixed price contract, confirm the scope drawings and specifications match the price, that all PCs and PSs are itemised with realistic allowances, and that variation procedures require written sign-off before work proceeds. Rise and fall clauses are uncommon in residential work but appear occasionally for steel or concrete in long programmes.

For a cost plus contract, capture the margin formula in plain words, set out the documentation the builder must give with each progress claim (timesheets, supplier invoices and delivery dockets) and lock the estimate that section 13 requires. Add an audit right and a cap or a target cost mechanism so the open-ended nature does not become an open chequebook.

Where this fits

Cost plus and fixed price decisions interact with provisional sums, prime cost items, variations and the GST treatment of new residential premises. Read those entries together when setting the contract structure on a new project.