If you’re getting building work done, you’re probably thinking about which kind of building contract you should sign.
Any good builder will draw up a contract for you to sign, and if they don’t offer a contract don’t hand any money over or let them start the work.
You may have heard that you can have a fixed-price or a cost-plus contract. But which one is best and which one should you choose?
We go over the difference between the two to help you decide what’s best for you.
A cost-plus contract is where the builder takes the actual cost of building the home and adds a fee for their overheads and management.
This may be a flat fee or a percentage of the total costs.
Bear in mind that you or your builder won’t know exactly what the costs are until they have finished, but the builder should give you an accurate estimate.
This estimate will be in the building contract, but it’s very likely to change slightly. You’ll pay the exact cost of labour and the materials, plus the fee the builder adds.
Advantages of a cost-plus building contract
- Good for large custom homes with levels of finish that might change during the build
- You’ll know your actual costs as you go along, and can decide where you want to inject the most cash
- Your best interests are considered, as you’re paying for all the labour costs and materials
If you trust your builder and know that they are working with your best interests in mind, a cost-plus contract might work best for you.
Disadvantages of a cost-plus contract
The disadvantage of this type of contract is that if you’ve only got a set budget with not much leeway, you could run into problems. Although you’ll be updated with costs throughout, they can still change.
You need to ensure you have more budget than the estimate to be on the safe side.
A fixed-price contract is where the contractor gives you an exact price for the work that covers all risks accepted by the builder under the contract.
If the cost of the actual building work exceeds the agreed price, the builder will have to pay for the additional costs. It sounds like a no-brainer – you should definitely go with the fixed-price contract. But is that true?
Advantages of a fixed-price contract
- You will only pay the sum that the builder quotes you at the start of the project, even if the work exceeds the price
- You’ll know exactly what you’re going to spend right at the beginning of the project
Disadvantages of a fixed-price contract
One large disadvantage of this type of building contract is that the builder will factor in lots of risks that may not be likely to happen. This is to cover themselves from ending up making a loss at the end – so you can end up paying much more.
Lump sum contracts
So you might think that a lump sum contract sounds the same as a fixed-price contract. The difference is, there is room for the price to change in a lump sum contract. Your builder will agree a ‘lump sum’ with you at the beginning of the work, but there is room for the price to go up or down depending on how the work goes.
Advantages of a lump sum contract
- You know what the total cost of the project will be if nothing changes
- If there are any changes in the nature of the works, the final price will reflect this
- Your builder will give you a more accurate price for the work. They won’t need to factor in risks they can’t control, which might not occur
Disadvantages of a lump sum contract
You still won’t know the exact cost of the building work until it’s completed, but you’ll pay a more accurate fee than if you were paying a fixed price.
You may also still end up paying more than the work actually cost to carry out. But for ease of keeping close to your budgeted figure, this is a good option.
So what will you decide? Lots of people go for the cost-plus option for large building works, but fixed-price is better for smaller jobs that won’t run into many problems or variations. It’s your choice!
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