Fixed price or cost plus.
It comes down to who carries the risk.

There are two fundamental ways to price residential building work. A fixed price, also called a lump sum, states a single contract sum for a defined scope. Cost plus charges the client the actual cost of the work plus an agreed fee or margin. Everything else that is said about the two, the certainty, the paperwork, the trust required, follows from one fact, that they put the risk of cost in different places.

Under a fixed price, the builder carries the risk. Price the job too low, or fail to control it, and the builder absorbs the difference. Under cost plus, the client carries the risk. If the work costs more, the client pays more, and the builder’s fee is largely unaffected. Neither is better in the abstract. The right choice depends almost entirely on how well the scope can actually be defined, which is why this is a decision about the job, not a preference. The wider contract framework both sit inside is covered in the contracts reference.

Why it matters

Choosing the wrong model creates predictable trouble. A fixed price on a genuinely undefinable scope forces the builder to either load it with contingency until it is uncompetitive, or price it thin and wear the overruns. Cost plus on a scope that could have been defined hands the client an open-ended bill they did not understand they were signing up for. The choice is one of the earliest and most consequential a builder makes on a job, and in Australia it is partly constrained by law.

A fixed price contract commits the builder to a defined scope for a stated sum. The sum moves only through the contract’s own mechanisms, principally variations for changes in scope and adjustments to prime cost and provisional sum allowances as the detail behind those allowances is settled. Within that frame, the price the client sees is the price they pay, and the risk of getting the cost wrong belongs to the builder.

That is why a fixed price demands a scope complete enough to price with confidence and rewards good estimating and disciplined cost control. It gives the client certainty, which most residential clients value highly, and it gives the builder the full upside of building efficiently. The cost of that certainty is front-loaded, the estimating has to be thorough and honest, because on a fixed price the estimate is not a starting position, it is a commitment. The relationship between the estimate, the contingency it carries and the margin it protects is covered in contingency in residential estimating.

A cost plus contract charges the client the actual cost of the work, materials, labour and subcontractors, plus the builder’s fee, set either as a percentage of cost or a fixed amount. The builder is paid for organising and managing the work rather than for pricing it accurately, and the risk of the work costing more than hoped sits with the client, who pays whatever it comes to.

This makes cost plus the right tool for a genuinely undefinable scope, complex renovation, heritage work, or a job that must begin before it is fully designed, where a fixed price would only be honest if it were loaded with so much contingency that it stopped being competitive. The trade-off is transparency and trust. Cost plus runs open-book, every invoice and hour visible to the client, which is a heavier ongoing administrative load and a relationship that depends on the client believing the costs are real and the management is in their interest. Where that trust is present and the uncertainty is genuine, cost plus is the fairer model. Where either is missing, it tends to end in dispute.

Read together, the two models trade the same handful of things in opposite directions, risk, scope certainty, how margin is earned, and administrative load.

In Australia the choice is not purely commercial. Domestic building legislation in several jurisdictions restricts or heavily conditions cost plus contracts for residential work, on the view that an open-ended cost exposes consumers to risk they cannot manage. The rules differ by state and change over time, so a cost plus arrangement that is permitted in one jurisdiction may be restricted or prohibited in another.

The practical consequence is that a builder cannot decide between fixed price and cost plus on commercial grounds alone. The legal position in the relevant jurisdiction has to be confirmed first, because it may remove cost plus from the table regardless of how well it would suit the job. This is general information and not legal advice, and the rules move, so confirm the current position for the jurisdiction before offering a cost plus contract. How the jurisdictions differ more broadly is covered in the contracts reference.