People ask me this more since the builder collapses of the last few years, usually because someone has told them one of the two is safer. Neither is safe on its own. They move the risk to different places, and the right one depends on the project and on you. We offer both. For most homes I recommend fixed price, and I will explain why. Then I will explain the two situations where cost plus is the better tool.
What each contract actually is
A fixed price contract is the one most people know. You have the plans and the selections, I price the whole job, and that is the number. There may be a few provisional sums for things that cannot be known until the ground is open, and they should be small and listed. Otherwise the price does not move unless you change the scope. If timber goes up, that is my problem. If the excavation turns out easier than expected, that is my gain. The risk of the unknown sits with the builder, and the builder is paid for carrying it.
A cost plus contract turns that around. You pay the actual cost of the labour, the materials and the trades as the work goes in, plus an agreed margin for the builder’s management and overheads. Every invoice is open to you. There is no fixed number at the start, only an estimate, and the final figure is whatever the job actually cost. The risk of the unknown sits with you, and in exchange you are not paying a builder to carry it.
Both are standard HIA contracts. Both need the same licence, the same Home Building Compensation Fund certificate before any deposit, and the same checks on the builder.
Why fixed price is the better model for most homes
Certainty, first. Most people building a home are borrowing to do it, and a lender wants to see a contract sum before it will fund a construction loan. Most will not lend against an open number. Even where they will, you are the one standing behind it.
It also makes for a better build. With a fixed price, everything is decided before the slab is poured: the plans, the engineering, the selections, the inclusions line by line. That discipline is what keeps a job on program. Cost plus lets decisions drift into the build, and decisions made on site are the expensive kind.
And it keeps both of us honest about the tender. A fixed price tender has to be itemised, so you can see what is included and what is provisional. If something is missing from my quote, it is my cost, not yours. That concentrates the mind. I have written about how to read a tender here.
The honest cost of certainty
A fixed price is not free. I am pricing risk I cannot see, so a prudent builder allows for it. On a straightforward block with complete drawings that allowance is small, because not much can surprise anyone. The less complete the drawings and the harder the site, the more a builder has to allow, and the more you are paying for something that may never happen. That is the point at which cost plus starts to make sense.
When cost plus earns its place
Two situations, in my experience.
The first is the genuinely high end project where the owner wants flexibility. Bespoke homes where selections are still being made, joinery is being designed as the house goes up, and finishes are chosen by seeing them in the room. Fixing a price on that is guesswork. Every change becomes a variation, with paperwork and a margin on top, and the relationship turns into an argument about what was in the contract. Cost plus lets the owner decide as they go and pay for what they actually chose. These clients are usually funding most of the build themselves, which is why the lender question does not arise.
The second is complex structural work with real unknowns. Deep excavation into rock, a house hung off a steep harbourside block, work inside an existing structure where nobody knows what is behind the wall until it comes off. I can price that fixed, but the allowance I would need to cover the worst case is money you would rather not spend if the worst case never arrives. Cost plus means you pay for the rock you actually hit. Much of this is visible before you buy the block, if you look.
Outside those two, I will steer you to fixed price, even though cost plus is the easier contract for a builder to sign.
One more thing I recommend on any cost plus job, and it may sound strange coming from the builder: engage your own project manager. Someone on your side of the table, paid by you, who reads the claims, checks them against the estimate and asks me the hard questions each month. On a fixed price job the contract does that work for you. On cost plus, nothing does unless you put someone there. A good builder has no reason to mind, and I would rather be questioned monthly than argued with at the end.
The cost nobody puts in the estimate
There is a price to cost plus that never appears on an invoice, and it is time. On a fixed price job the decisions are made before we start, so the trades arrive, the materials are on site and the work runs in sequence. On cost plus the decisions are made as the house goes up, and the house waits for them. A tiler cannot start until the tile is chosen. The joiner cannot order until the drawings are signed off. Each decision that is still open when the trade is ready costs days, and the days add up to months, and on cost plus every one of those months is paid for by you.
It also changes what the build is like to live through. Cost plus puts you in the decision seat every week, often with a trade on site waiting for the answer. Some clients want exactly that, and for them it is the whole point. Most people do not realise how many decisions a house involves until they are making them under pressure, with a program slipping behind each one. That is not a reason never to use cost plus. It is a reason to be honest with yourself about whether you want to make several hundred decisions on a builder’s timetable, or make them once, in your own time, before the slab goes down.
What I put in front of you either way
On a fixed price job you get an itemised tender, with the provisional sums few, small and explained, and a straight answer to which items are fixed and which are not. On a cost plus job you get a written estimate before you sign, the margin stated plainly, and every claim backed by the trade invoices behind it, which is exactly what your project manager will be reading.
The contract, the insurance and the licence are the same under both. Cost plus is not an excuse for a handshake.
Hear it in my own words
The conversation this comes from is on The Mortgage Chat, recorded in July 2023. Fixed price and cost plus explained, from 15:03. Who cost plus actually suits, and why the bank matters, from 18:03.
If you are not sure which suits your project, bring the drawings to the intro call. I will tell you which contract I would sign if I were on your side of the table, and why.