Fixed vs Cost Plus Home Building Contracts - don't believe the hype..

It is quite saddening to read stories of relationships with builders breaking down.  Of course, much like anything, you will hear x10 a bad review and often there are great relationships and outcomes that are not shared as widely. 

But this skepticism around working with builders challenges logic when it comes to setting up an agreement with them.

If you don't trust your builder, don't work with them. It's that simple. If you are only focused on cheap and working with the cheapest, remember the adage, you get what you pay for. Communication, knowledge/experience and trust should be your main priorities when choosing who to work with, as a bad build will cost you significantly more in time, stress and mental load later on than a few savings during the build. 

When to have a contract

For work over 20k, best practice is to have a contract in place to protect both parties which includes home builders warranty insurance. You can only get this insurance if you are working with a builder who is licensed and eligible for it. So be sure to ask for evidence of these things. 

There are two types of contracts that are typical, as outlined below; fixed price or cost plus. 

Fixed Price Contract

A "fixed price contract" typically is just that, a fixed set price based on your original plans and decisions. It includes some allowances for unforeseen time blow outs and the positive to the home owner is it ensures you are aware of your progress payments and final cost. Lots of homeowners prefer this contract as they feel a sense of security and comfort, particularly if they do not fully trust their builder - which is an issue in itself.

The common fallacy around the fixed price contract is that clients feel that it will give a sense of guarantee around the project running on time, as the builder would be losing money on the job if it ran overtime. But this is completely untrue.  Of course builders wish to achieve or come under targets for time, as its in the best interest for everyone. But if there job is delayed due to weather, client variations, and unforeseen issues; they typically have other work at various stages to keep them going.  

The negatives for the homeowner with a fixed price contract also include: 

• If you change your mind along the way on any of your original decisions, this will require a contract variation which may slow the project down and cost you considerably more.
• For example; the standard Fair Trading contract for building allows for up to an additional 20%+ margin on variations that are made by the client. This is a considerable margin - but it acknowledges that the variation comes at a cost to the builder, other trades and their other work. The project must cease while a variation contract is made and signed, adding time and cost to all involved, including ofcourse the client. 
• If the job goes under schedule and sees savings, the builder still takes this fixed price.  
• It limits the flexibility you have with your builder when the project is underway.  They may wish to recommend practical cost saving approaches or improvements that are not in the original plans, but they may feel challenged to do so if it involves more variations paperwork and holding up the project.

Cost Plus Contract

"Cost plus" contracts are what most builders prefer to work with. 

The positives are:

• You will still of course receive an estimate on the project final costs, but gives more allowance for cost and time savings. You get charged for what is done and reap the rewards on savings that can be made along the way. 
• Sometimes there are long time gaps between approval and starting your project and you may want to have the option of changing your mind. Cost plus arrangements mean there is flexibility to work with the homeowner along the way, adding in features they may not have considered with less stress and delay that you would experience in the fixed contract approach. 

This type of arrangement does require you to trust your builder, as they will charge you their time and supplies plus an agreed margin in increments as agreed.  So you won't always know the EXACT final price  but you will have a ball park, be involved in changes, control decisions and spend and everything is still under contracted agreement. 

We can show you both options and talk you through them in more detail and we will respect which ever way you wish to go on your project. Contact ustoday for a no obligation chat on your upcoming project in the Inner West of Sydney or read our FAQ's page for more answers to common questions.