Fixed price vs cost plus: choosing a building contract

Once your design is coming together, you will need to agree how the build will be priced. In New Zealand, most residential builds use one of two contract types: fixed price or cost plus. Each has its place. The right one depends on how settled your design is and how you feel about certainty versus flexibility.

What is a fixed price building contract?

With a fixed price contract, the builder agrees to build a defined design and specification for an agreed sum. If the builder’s costs go up, that is generally the builder’s problem, not yours. Your price only changes if the scope changes, for example through a variation you ask for, or through items the contract allows to move, such as allowances.

What fixed price does well

• Certainty. You know the price for the agreed work before the build starts.
• Clear scope. The detailed specification needed for a fixed price makes everyone think through the decisions early.
• Risk sits with the builder. If the builder has underestimated labour or materials for the agreed work, they generally carry it.

What to watch for

• It is only fixed for what is written down. Anything not in the plans and specification can become a variation.
• Allowances can move. If part of the price is an allowance, such as for tiles or lighting, the final cost depends on your choices.
• It takes more work up front. The design and specification need to be well developed before a builder can fix a price.
• Builders build in a margin for risk. That is fair, because they are carrying it.

What is a cost plus contract?

With a cost plus contract, you pay the actual cost of labour, materials and subcontractors, plus an agreed margin or fee for the builder. There is no fixed total. You usually get an estimate at the start, but the final price is whatever the work actually costs.

What cost plus does well

• Flexibility. You can make decisions and refine details as the build goes.
• You can start sooner. The design does not need to be fully specified before work begins.
• Transparency. You see the real costs of the job as they come in.
• Suited to unusual builds. Complex or one-off designs, renovations, or sites with real unknowns can be hard to price fairly up front.

What to watch for

• Less certainty. The final cost can be more than the estimate.
• You carry more of the risk. If prices rise or the job takes longer, you generally pay.
• You need to stay close to the numbers. Regular cost reports and a good relationship with your builder matter.

Cost plus vs fixed price building contract: side by side

• Price: fixed price gives an agreed total for the agreed scope. Cost plus gives an estimate, with the final cost based on actual costs.
• Risk: fixed price puts more risk on the builder. Cost plus puts more on you.
• Design stage needed: fixed price needs a well-developed design and specification. Cost plus can start earlier.
• Changes: both handle changes through variations, but under cost plus they are simply added to the running cost.
• Best for: fixed price suits a settled design and a firm budget. Cost plus suits complex projects or people who want to decide as they go.

What the law requires either way

Under the Building Act, residential building work worth $30,000 or more, including GST, must have a written contract. Before you sign, the builder must also give you a disclosure statement and a checklist explaining your rights.

Whichever type you choose, the contract should set out the scope, the price or pricing method, how variations are handled, the payment schedule, and the timeframe. Your lawyer can review it before you sign. The Master Builders guarantee is also worth understanding, as it sits alongside your contract.

How to choose

A few questions usually make the choice clear:

1. How settled is your design? If plans and specification are well developed, fixed price is easier to agree.
2. How firm is your budget? If you need certainty, fixed price gives you more of it.
3. How much do you want to decide as you go? If you want room to change your mind, cost plus may suit.
4. Are there big unknowns on the site? Unusual ground or access can make a fixed price harder to agree without large allowances.

Questions to ask your builder

• What exactly is included in the price, and what is excluded?
• Which items are allowances, and what are they based on?
• How are variations priced and approved?
• How often will I get cost updates?
• What happens if something unexpected turns up on site?

Good communication matters under either contract. We keep in constant contact with clients through the build, and you are welcome to visit the site. You can read more about how we work on our process page.

“Everything was really transparent and the build process itself could not have gone more smoothly.”

The short version

• Fixed price gives certainty for a clearly defined scope.
• Cost plus gives flexibility, with more of the cost risk on you.
• Either way, get the scope, allowances and variation process in writing.
• Talk to your builder early about which suits your design and site.

If you are still working out costs, our guide to what it costs to build in the Waikato is a good place to start. When you are ready to talk about your own build, get in touch.