What is a fixed price building contract?

If you are building, you will hear a lot about the fixed price building contract, and your lender will almost certainly want to see one. It is the document that gives everyone certainty about what the home will cost, but the word fixed is doing some heavy lifting, because the price can still move in defined ways. Here is what it really means.

What a fixed price contract is

A fixed price contract, also called a lump sum contract, sets the total price to build your home before construction begins. In Australia these are usually based on standardised templates from industry bodies such as the Housing Industry Association or Master Builders. The fixed price includes the builder margin, which covers their business costs and overheads, and the builder is generally not required to disclose that margin to you.

Fixed price versus cost plus

The main alternative is a cost plus contract, where you pay the builder actual costs as they are incurred plus an agreed margin. With cost plus, the final price is not known upfront. That is fine for some complex projects, but it is why most mainstream lenders will not fund a build on a cost plus basis, they cannot calculate how much to lend against an unknown total. For a standard residential build, a fixed price contract is what lenders expect.

Why lenders require it

From the lender point of view, a fixed price contract provides cost certainty. It lets them work out the total project cost, combine it with the on completion valuation, and decide how much to lend and how to schedule the progress payments. It also protects you, because for the base scope of work the builder cannot simply ask for more money partway through.

Why fixed is not totally fixed

This is the part buyers most often misunderstand. A fixed price contract limits cost increases to defined circumstances, it does not freeze the price completely. There are two main ways the final figure can change.

Variations

A variation is any change you make after signing, upgrading the tiles, adding a feature wall, changing the appliances, moving a wall. Variations are extra to the contract and come out of your pocket, and they should always be documented and approved in writing before the work is done, so there is no dispute about the cost.

Provisional sums and prime cost items

These are allowances for work or items that could not be precisely costed when you signed. Provisional sums cover uncertain work such as site works, excavation or retaining walls, and prime cost items cover things not yet selected, such as fixtures and fittings. The allowance is already part of your contract price, but if the actual cost comes in above the allowance, you pay the difference, often plus the builder margin on top.

The provisional sums trap

Because of how allowances work, a contract stuffed with large provisional sums is not really a fixed price at all, it is fixed except for everything that was left unpriced. The more that is locked down to a real figure before you sign, the more genuine certainty you have. So it is worth scrutinising the provisional sums and prime cost allowances closely, and asking whether items can be properly priced rather than left as estimates.

The construction timeframe and delays

A fixed price contract usually includes a construction timeframe, but it will also allow extensions of time for things like bad weather, supply issues or regulatory delays. So the build can legitimately take longer than the headline timeframe without breaching the contract. Understanding the delay provisions helps you set realistic expectations.

Protect yourself before signing

A few steps reduce your risk. Have the contract reviewed before you sign, ideally by someone who knows building contracts, to check for unfair rise and fall clauses and unrealistic allowances. Make sure variations must be agreed in writing. Keep a cash buffer for variations and allowance overruns. And keep good records of every change and communication during the build.

How it ties into your finance

Your fixed price contract is not just a builder document, it is central to your loan. The lender uses the fixed price and the plans to do the on completion valuation and to set the schedule of progress payments. So getting the contract right, and understanding where the price can move, protects both your build and your finance, which is covered further in our guide on how a construction loan works.