Fixed Price vs Cost Plus Contracts in the Current Financial Climate
In the current financial climate in Australia, clients are facing unprecedented challenges, with mortgage rates, inflation and cost of living prices increasing, particularly when it comes to engaging with builders on a new project. One of the key decisions our clients face when starting a building project is choosing between fixed-price and cost-plus contract.
Fixed Price Contracts
Fixed price contracts are agreements where the builder agrees to complete a project for a fixed price. This means that the builder is responsible for any additional costs that may arise during the project. A builder will generally work on a higher margin for fixed price contracts to allow for prices increases and contingency.
However, there may be variations to fixed price contracts, such as:
Fixed price with allowances: This type of contract includes a fixed price for the project, but also includes allowances for certain items that may require additional costs. For example, a fixed price contract for a kitchen renovation may include an allowance for the cost of appliances.
Fixed price with contingency: This type of contract includes a fixed price for the project, but also includes a contingency amount to cover unforeseen costs. This can provide additional financial security for clients, as they know that unexpected costs can be covered without affecting the overall project budget.
Overall, fixed price contracts can provide a level of certainty and predictability for clients, while also reducing the risk of cost blowouts. However, it is important for clients to carefully consider the variations to fixed price contracts and to communicate effectively with their builder throughout the project.
Cost Plus Contracts
On the other hand, Cost plus contracts involve the builder charging for the cost of materials and labour, plus an additional percentage (builders margin) of the total cost to cover overheads and profit. This type of contract can be beneficial for builders as well as homeowners as the budget becomes an open book and there is full transparency of all costs. It also provides a level of safety to the builder if costs go over budget. A builder will also generally charge a lower margin for a cost-plus project as there is not as much risk involved.
Variations to cost plus contracts include:
Cost plus percentage basis: This type of contract is the most common cost-plus method it. It involves the the cost of materials and labour plus the builder's margin added to those costs.
Cost plus nominated lump sum: This type of contract includes a fixed amount to cover builder's overheads and profit. If the construction period is extended outside of the provision of the contract the fee is increased accordingly. If the builder completes the project ahead of schedule, the full fee is payable. This can be good as the builder has more incentive to complete the project quickly.
Overall, cost plus contracts can be beneficial for clients that are looking for flexibility in their budget or that are working on projects where the scope is not well defined. However, it is important for clients to carefully consider the risks and benefits of cost plus contracts and to communicate effectively with their contractor throughout the project to ensure a successful outcome.
In the current financial climate, clients may be more inclined to use fixed price contracts as they provide a level of certainty in uncertain times. However, it is important for clients to carefully consider the risks and benefits of both contract options before making a decision. Factors such as the scope of the project, the level of risk involved, and the financial resources available all need to be taken into account. Additionally, clients should consider the need for flexibility in the contract terms, and their ability to negotiate with the contractor.
The choice between fixed price and cost plus contracts will depend on the specific project requirements and the risk tolerance of both the client and builder. It is important for both parties to have a clear understanding of the contract terms and to communicate effectively throughout the project to ensure a successful outcome. By working together, clients and builder can achieve their project goals while minimising financial risk and uncertainty.