Is a Fixed Price Building Contract Right for You?

For most people they only know one form of building contract, the fixed price. This is also known as a lump sum or hard dollar building contract.

But did you know there are many different forms of building contract that you can use?

In my 29 August 2012 blog I shared the different types of building contracts and said that I would elaborate on each type in upcoming blog posts. In this post I will discuss the fixed price building contract that most people use on their home renovations.

The fixed price contract is the traditional method of engaging building contractors; it requires the builder to provide a fixed lump sum price usually in a competitive tendering situation.

The highly competitive nature of a tender is likely to result in a good price result for the owner but what this means is that the builder has a very small profit margin. If the builder then makes a few mistakes as the project progresses and a couple of subcontractor or supplier prices are more than the builder's budget then there is limited scope for the builder to absorb cost blow-outs.

So where does that leave the owner? Assuming the builder does not liquidate, go bankrupt or some other form of arrangement with its creditors, the builder will become very active in seeking additional monies from the owner via variations and delays.

In short, this form of building contract is highly adversarial but gives good certainty of cost. But cost certainty will only come if the documents included in the building contract are good, appropriately describe the scope of works and do not have errors and omissions which would lead to delay and variations claims.

I have seen how a fixed price contract has gone very wrong due to poor documentation, wrong for the owner that is, not the builder.

But if the documents are good then there is limited scope for price change and the owner is able to have cost certainty for their budgets.

For a property owner the secret is to ensure that the documents are complete, do not have errors, ambiguities and omissions, and are properly coordinated between teh various consultant designers.

On the other hand, for the builders the secret is to go through the project documents "with a fine tooth comb" right at the outset to find out where the opportunities lie.

If the building contract has been well prepared the builder will have had appropriate documents to tender from and can only blame themselves if their pricing was wrong.

This is not my preferred form of building contract, but more on that in further upcoming posts.

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