Getting the right fit: fixed cost vs. cost plus

Luke Parker
Getting the right fit: fixed cost vs. cost plus

Renovations are a fantastic way to add value to your home and improve your lifestyle, but they’re notorious for running over time and over budget – in some cases spiralling out to eye-popping multiples of your original estimates.

Generally, builders engaged in renovation work do so based on one of two pricing methods: either a fixed cost (or ‘lump sum’) contract, or ‘cost plus’. A fixed cost contract sets out the details of your home renovation in advance, and the builder provides you with a set price to complete the specified work.

SEE ALSO: How much should you spend on your renovation?

A cost plus contract means that the builder charges you for work done, using a margin. The margin can vary depending on the work that must be done, but is generally around 10% on top of the builder’s cost for materials, and 15% for labour. Your builder may provide you with an estimate up front, but this is not a set cost, just an initial guideline. A “huge majority” of projects are done on a cost plus basis, says Andrew Millard, director of quantity surveying company Rawlinsons.

Which pricing method might work best for your project?

(Find out more about getting a home loan for your next renovation project)

 

5 Advantages of Fixed Cost Contracts

  1. You have a clear and accurate total price for the work. But there may still be times when unexpected costs crop up – “the unknown unknowns, like finding pipes that aren’t on the council plans,” says Gary Caulfield, general manager of Construction Cost Consultants.
  2. There is an incentive for the builder to work faster – the sooner a job’s finished, the more money he will make.
  3. You can put the project out to tender and get several comparable prices.
  4. Generally, more of the risk lies with the builder because a builder won’t normally be entitled to extra payments if there are cost overruns.
  5. Banks are more likely to lend you money. Plus in some cases they send out their own quantity surveyors.

 

5 Advantages of Cost Plus

  1. There are fewer upfront consultancy costs and delays – you don’t need to pin down as many of the details before you start.
  2. It’s easier to make changes in the middle of the project and you can deal directly with your builder.
  3. You’ll have more builders to choose from: small operators aren’t pricing experts, and they often prefer to avoid fixed cost contracts.
  4. It could be a cheaper option. Builders who offer fixed cost contracts usually include a margin in the lump sum contract, and the “cost plus” option can give you more transparency about these margins.
  5. If the builder goes into liquidation in the middle of the project, you’ve only paid for the work done and another builder can easily take over.

If you’re an inexperienced renovator, “I would absolutely recommend a lump sum contract,” says Millard. “But cost plus does suit complex alteration projects. If you go with cost plus, you put a lot of trust and good faith in your builder.” So choose carefully – talk to his other clients and make sure you have a good rapport.

Whatever your project, research it well, adds Caulfield. “Every hour at the beginning will save you 10 hours at the end.” That initial $500 to $1,500 for a quantity surveyor could ultimately save you from a massive cost overrun.

SEE ALSO: How much should you spend on your renovation?

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