A fixed price contract sets the total before work starts. A cost plus contract has the client pay the builder’s actual costs plus a margin, so the final total is not known at signing. Fixed price puts the cost risk on the builder. Cost plus puts it on the client, and in some states the law limits or discourages it.
This is about residential building in Australia, using regulator pages. If you are in the United States, the terms exist there too, but the rules are different and are not covered here. It is general information only and not legal advice.
What each contract type means
Fixed price (lump sum). One total price for a defined scope. The builder prices the job and carries the risk if it costs more. The price still moves for approved variations, and for provisional sum and prime cost items, which settle against actual cost.
Cost plus. The Queensland regulator defines it as a contract where the amount the contractor will receive cannot be accurately calculated when the contract is entered into, even ignoring prime cost and provisional sum items. Typically the client pays actual costs plus a percentage or fee for overheads and profit, for example “cost plus 20%” (QBCC on cost plus contracts).
Time and materials. Similar in effect. The client pays for hours and materials as used, often with a rate card. Consumer Affairs Victoria gives charging by the hour and not giving a fixed price as an example of a cost-plus method.
Who carries the risk of cost and time
| Fixed price | Cost plus | |
|---|---|---|
| Final price known at signing | Yes, apart from variations and allowances | No |
| Risk of cost overruns | Builder | Client |
| Builder’s incentive on cost | Keep costs down, margin is what is left | None built in, margin grows with cost |
| Client’s check on the builder | Compare the price to other quotes | Receipts and records |
| Needs a settled scope | Yes | Less so |
The Queensland regulator says that final costs under cost plus are often considerably more than homeowners anticipated, and that there is a disincentive for the contractor to minimise costs because the margin grows with the cost base. Its contract-types page reports owners with final costs 50 to 100 per cent higher than expected (QBCC on agreement types).
When cost plus fits and when it does not
Cost plus deals with uncertainty openly. If you cannot know what is under a floor, in a wall or in the ground, a fixed price just hides a guess inside a number.
It can fit work where scope really cannot be known: an old building opened up for the first time, urgent repairs, or a job where the client keeps changing direction and wants the builder to follow.
It fits badly when the scope is clear and the client wants a number to borrow against or budget on. It also fits badly with an owner who has no way to check receipts and no appetite for open-ended cost.
Most residential jobs sit in between: mostly knowable, with a few unknowns. A fixed price with clearly worded provisional sums does that job. Read our guide to provisional sums and prime cost items.
What regulators say about cost plus contracts
- Queensland. The regulator says cost plus contracts may legally be used for domestic building work but it does not recommend them. Non-completion assistance under the Queensland Home Warranty Scheme is not available when cost plus or construction management contracts are used. It strongly recommends formal legal advice before using them (QBCC).
- Victoria. Consumer Affairs Victoria says the threshold above which cost plus contracts are permitted is $1 million. On renovation of an existing house, a cost-plus contract can cover only the investigative work needed to establish the contract price; the builder must give a fair and reasonable estimate of the total and enter a fixed-price contract for the remaining work (Consumer Affairs Victoria). Victoria’s domestic building contract laws were amended in 2025 and the new laws take effect by 1 December 2026, so check the current rules.
- New South Wales. The regulator page we read mentions cost plus only to say progress payments must be supported by receipts or other verifying documents. It states a written contract is required over $5,000 and that the maximum deposit is 10 per cent (NSW Government on contracts).
- Western Australia. Building and Energy describes a lump-sum contract, with a calculated total, and a cost-plus contract, with costs calculated as a running tab, and tells owners to read the fine print and get independent advice. We did not find a WA rule limiting cost plus on that page (WA Building and Energy).
South Australia, Tasmania, the ACT, the Northern Territory and New Zealand are not covered here. This is general information, not legal advice: check with your regulator or a solicitor for your situation.
Using an early paid stage to reach a fixed price
Victoria’s rule describes a path many builders already like: spend a limited, paid amount working out what the job really is, then fix the price. The same idea works in other states as a preliminary agreement. The Queensland regulator describes one as an agreement made before the building contract so the contractor can be paid upfront for early work such as designs, soil tests and contour surveys (QBCC).
The effect: the unknowns that made you want cost plus get answered first, and the client then gets a number they can budget around. Read charging for preliminary work, and for how this sits with design work, design and construct or traditional.
Explaining the choice to a client
Clients usually want one thing: to know what it will cost. Start there.
I can give you a fixed price once we have done the site investigation and the drawings. Until then, I can only give you a range. The alternative is I charge actual cost plus a margin, which means the total is open until the end. Most clients prefer the fixed price, and I would rather work it out first.
If you do use cost plus where your state allows it, give the client what they need to feel safe. A written margin, a cap or a trigger to stop and re-confirm if costs pass a set figure, regular reports and copies of invoices. Then have a solicitor read the contract. For renovation work see renovations and extensions, and our quote follow-up for what happens after the price goes out.
Common questions
What is a cost plus contract?
One where the client pays the builder’s actual costs plus a margin or fee, so the total is not known when the contract is signed.
Is cost plus legal?
It varies by state. Queensland allows it but does not recommend it. In Victoria it is permitted only above $1 million, with an exception for investigative work on renovations, and the rules change by 1 December 2026. Check your state.
What is the difference between fixed price and lump sum?
In practice, none. Both mean one agreed total for a defined scope. Variations and allowances can still move the final amount.
Is time and materials the same as cost plus?
Close. Both leave the final total open. Consumer Affairs Victoria gives charging by the hour with no fixed price as an example of a cost-plus method.