Fixed-price vs cost-plus: what a new-build contract actually protects you from

The biggest decision in a new-build contract is not the price. It is who carries the risk if the price turns out to be wrong. Fixed-price and cost-plus contracts answer that question differently, and the right one depends on how well-defined your project is before you sign — not on which sounds safer.

This is general information, not legal advice. Have any residential building contract checked by a solicitor before you sign it.

The core difference

• Fixed-price (lump sum). The builder quotes a total price for a defined scope of work, based on finished drawings and specifications. The builder carries the risk if their costing was wrong; you carry the risk only for anything you change or anything genuinely unforeseen (such as rock or contaminated soil, if the contract allows for it).
• Cost-plus. You pay the actual cost of labour and materials, plus an agreed margin for the builder. You carry the risk of the final figure, in exchange for more flexibility to make decisions as the job goes — useful on a renovation where the scope will likely change once walls are opened up, but risky on a new build where it is used to avoid finishing the design.

A fixed price is only as reliable as the documentation behind it. A fixed-price quote against incomplete drawings is not actually fixed — it is a placeholder that will be "varied" once the gaps are discovered.

What the Home Building Act requires either way

Whichever structure you use, residential building work above the contract threshold set under the Home Building Act 1989 must:

• Be in writing, and signed by both parties before work starts.
• Include the matters required by the Act and its regulation — a sufficiently detailed description of the work, the contract price (or, for cost-plus, how the price will be calculated), any allowances, the builder's licence and insurance details, and the statutory warranties that apply to the work.
• Give you a cooling-off period on contracts over the threshold, allowing you to withdraw within a set number of business days after signing — check the current threshold and period, as both have been indexed over time.
• Be backed by Home Building Compensation Fund cover, confirmed before deposit and work begin, as discussed in our post on the approvals pathway.
• Limit the deposit the builder can take before work starts, and set out how progress payments are claimed as stages are completed.

NSW Fair Trading's building a new home guidance sets out current thresholds and requirements, and is worth reading before you sign, regardless of which pricing model you choose.

Where cost-plus contracts go wrong

Cost-plus is not a bad structure — it is the right tool when scope genuinely cannot be fixed in advance. It goes wrong when it is used to paper over a design that was never finished, because then "actual cost" becomes a moving target with no reference point to check it against. If you are offered a cost-plus contract for a new build with completed drawings, ask why — a fully documented new build is exactly the situation a fixed price is designed for.

Where fixed-price contracts go wrong

A fixed price only protects you if the scope behind it is complete. Watch for:

• Provisional sums and allowances standing in for real decisions. An allowance for tiles, tapware or appliances is reasonable if the number reflects what you actually intend to choose. It is a problem if it is set low to make the headline price look better.
• Exclusions buried in the fine print. Site costs, authority connections, and contingency for unknown ground conditions are often excluded or capped. Ask what happens, and who pays, if the real figure is higher.
• A scope that is thinner than the price implies. Compare the drawings and specification referenced in the contract against what you discussed verbally. If it is not written down and referenced, it is not included.

Questions worth asking before you sign

• Is the price based on finished, approved construction drawings, or on a concept design that will still change?
• What allowances are included, and are they realistic for what I actually want?
• What is the variation process, and does every variation have to be agreed and priced in writing before it proceeds?
• What happens to the price if something unforeseen is found once work starts?
• Can I see the current Home Building Compensation Fund certificate and the builder's licence before I sign?

Getting this right before you sign is far cheaper than renegotiating it once the slab is down. If you want a second set of eyes on a contract or scope before you commit, get in touch.

Sources

• Home Building Act 1989, NSW Legislation
• Building a new home, NSW Fair Trading
• Home Building Compensation Fund, NSW Government

This article is general information, not legal advice. Contract requirements, thresholds and cooling-off periods are updated from time to time — have your contract reviewed by a solicitor and confirm current figures with NSW Fair Trading before you sign. Full website disclaimer