Cost-plus versus fixed price building contracts
Fixed price suits a scope that is fully resolved at signing. Cost-plus suits a scope that is still being resolved, and it runs on open-book transparency. A negotiated tender lets you begin cost-plus through pre-construction and convert to a fixed price once the design is settled. The contract structure is one of the most consequential decisions on the project.
On a project like Joy Terrace in South Yarra, the right structure follows from how settled the scope is at signing, which is the real question behind the choice. This article covers cost-plus and fixed price as used in Victoria, how each works and when, and how a negotiated tender draws on both.
Fixed price
A fixed price (or lump sum) contract sets the total construction price at contract signing. The builder agrees to deliver the documented scope for the agreed price. Variations to scope are priced and approved through a formal variation procedure.
How fixed price works. The documentation set is complete at tender. The builder prices every scope item before signing. The price covers the trade cost, the preliminaries, the margin and a builder-held contingency for risks the builder accepts. The price holds for the duration of the contract subject to the variation procedure.
Where fixed price works well. Projects with fully complete documentation, scope clarity, low constructability risk and minimal unknowns. New homes on a clean block with a fully documented architectural brief are good candidates.
Where fixed price struggles. Heritage renovations with unknown conditions behind retained walls. Projects with incomplete documentation at contract. Projects where the client is likely to evolve the brief during construction. In all these cases, the variation volume is high, and the variation procedure creates friction.
The hidden risk in fixed price. Builders pricing a fixed price contract necessarily build risk into the margin. Where the documentation has gaps, the price covers the worst case. Where the project is high-risk, the contingency is generous. The client pays for these risks in the headline price whether or not they crystallise.
Cost-plus
A cost-plus contract pays the builder for the actual cost of the works plus a defined builder fee. The fee can be a percentage of the actual cost or a fixed dollar amount.
How cost-plus works.
- Trades are engaged at their actual cost - Materials are purchased at their actual cost - Preliminaries are charged at their actual cost - The builder fee is added per the contract definition
The client pays the actual cost of the home.
The client pays the actual cost of the home plus the agreed margin, and sees every invoice along the way. The books are open. The trade-off is that the final figure is not fixed at signing; it lands where the documented decisions take it.
Where cost-plus fits
Cost-plus suits projects that need to start before the documentation is fully resolved. Heritage work with genuine unknowns behind the fabric. Clients who want line-of-sight on every dollar and are comfortable holding the contingency themselves. TCON runs cost-plus on the MBAV Domestic Cost Plus contract (DCP-2), with the same reporting cadence as a fixed-price job.
It rewards trust and transparency, and it asks more of the client during the build. Where the design is resolved and the client wants certainty, fixed price remains the better instrument.
How a negotiated tender draws on both
A negotiated tender brings the builder in during design, so the price is built openly against the developing documentation rather than bid blind at the end. Cost data is shared as the drawings resolve, the way cost-plus shares it during construction. Once the documentation is settled, the number converts to a fixed-price contract, with the certainty that form brings.
That is where most TCON projects land: open pricing while the design is moving, a fixed price once it is resolved.
