When you're building or renovating, one of the first big decisions you'll face is what type of building contract to sign. The two most common structures are fixed-price and cost-plus - and understanding the difference can save you stress, time, and money.
To make sense of the pros and cons, we spoke with Lachlan from Contract Admin Pro, who helps homeowners review and understand their contracts every day.
Why your contract type matters
Your building contract isn't just paperwork - it sets the framework for how your project will run. The type you choose determines how much cost certainty you have, how flexible you can be with changes, and how risk is shared between you and your builder.
"Choosing the right contract type is critical because it determines how risk is shared between you and your builder," says Lachlan. "Get it wrong, and you can end up locked into costs or exposed to blowouts you never anticipated. The contract is not just paperwork - it's the rulebook for how your project will run."
What is a fixed-price contract?
A fixed-price contract locks in a single agreed price for the scope of works outlined at signing. Builders typically build in a higher margin - often 15-25% - to cover the risk of rising labour and material costs during the project.
This setup works well for standard builds where the scope is clear and unlikely to change. It also makes it easier to secure finance approval and provides confidence around budgeting.
But 'fixed price' doesn't always mean 'no surprises.'
"Even under a fixed-price contract, variations almost always occur," Lachlan explains. "It's rare for a residential project to finish without them. We regularly see between 5-15% of the contract value added back through variations, often driven by things like site conditions, client design changes, or allowances that weren't fully scoped and understood upfront. That's why it's so important to review the contract allowances carefully before signing."
What is a cost-plus contract?
With a cost-plus contract, the builder charges the actual cost of materials and labour, plus an agreed margin - usually 10-20%, depending on the project's size and complexity.
This model is well-suited for custom or evolving builds - like complex renovations, heritage projects, or architect-designed homes - where the documentation isn't finalised and further design development is required.
The trade-off is that you, not the builder, carry the risk of price changes. If material or labour costs increase during the build, those increases flow directly through to you. It also requires more trust and involvement, as you'll need to monitor progress and costs closely.
"Cost-plus contracts can provide transparency because you can see exactly what the builder is paying for materials and labour," Lachlan says. "They also allow more flexibility for design changes or unforeseen issues. The trade-off is risk - if costs escalate, you're the one carrying that increase. You need a high level of trust in your builder and a system of checks and balances to make sure you're getting fair and reasonable value."
Trust and transparency
Trust is critical - especially under a cost-plus arrangement where you're paying actual costs. A transparent builder should:
- Provide regular, itemised invoices showing supplier receipts and labour hours.
- Be open about their margin and how it's applied to materials and labour.
- Share updated cost forecasts throughout the project.
"A good builder under a cost-plus contract should be willing to show you supplier invoices, time sheets, and updated forecasts," says Lachlan. "If they resist, that's a red flag. Even with a cooperative builder, most homeowners underestimate how complex it is to interpret invoices and margin calculations under cost-plus. Without an independent expert reviewing the paperwork, it's easy to miss inflated charges, duplicate costs, or margins applied incorrectly - issues that can quietly add thousands to your build."
If you're not confident in interpreting the financial detail, engaging a third-party expert can help you check whether what you're being billed is consistent with your contract.
Financing considerations
One of the most important challenges with cost-plus contracts in Australia is that most banks won't finance them. Unlike the simplicity of a fixed-price agreement, the variable nature of cost-plus contracts makes banks nervous about project scope, budget creep, and incomplete builds.
Fixed-price contracts are the default for most banks when issuing construction loans. These contracts provide lenders with a clearly defined cost schedule and progress milestones, allowing them to confidently manage risk.
In contrast, cost-plus contracts generally aren't accepted by mainstream banks. When they are considered, the loan-to-value ratio (LVR) tends to be significantly lower, and proof of cash reserves becomes essential.
Some mortgage brokers can help find lenders that entertain cost-plus scenarios - but borrowers should expect stricter terms, more documentation, and added scrutiny.
"If you're funding a build from your own savings or equity, cost-plus can work well because you're not constrained by bank requirements," says Lachlan. "But if you need construction finance, a fixed-price contract is almost always going to be the smoother path. Lenders like certainty, and fixed-price contracts give them that."
How market conditions influence the cost
While no one can predict exactly where material and labour costs will go, thinking about how different scenarios might play out can help you choose a contract that fits your risk tolerance.
- If costs rise during your build, a fixed-price contract can provide some protection. The builder absorbs the increases, which reduces their margin but shields you from unexpected price hikes.
- If costs remain steady or fall, a cost-plus contract can sometimes work out cheaper overall because the builder's margin is typically lower and there's no built-in 'risk buffer' as there is with fixed-price.
"We've seen how market shifts play out in real time," Lachlan explains. "During the pandemic, timber and steel prices spiked dramatically - reinforcing steel climbed by over 43%, steel beams and sections went up more than 41%, and structural timber rose nearly 40% in just one year (Master Builders NSW, 2022). Clients on fixed-price contracts were insulated from most of that pain, while those on cost-plus saw their budgets stretched. On the flip side, when material prices stabilised, cost-plus clients sometimes came out ahead, because they weren't paying for that risk buffer."
Final thoughts
Your building contract is the foundation of your project, so it's worth taking the time to really understand what you're signing. Whether you're leaning towards fixed-price for the certainty, or cost-plus for the flexibility, a second set of expert eyes can make all the difference.
If you're not 100% confident about what's in your contract - or just want some peace of mind - chat with Lachlan and the team at Contract Admin Pro. They review contracts every day and can help you spot potential issues before they turn into problems, saving you time, stress, and potentially a lot of money down the track.