What a fixed-price contract actually fixes

A fixed-price contract fixes the price of the work described in it. That sentence sounds circular. It is actually the whole subject. The price is only as fixed as the description is complete, and most of the grief we see between homeowners and builders starts in the gap between what the homeowner thought was described and what the contract actually says.

So before you take comfort from the words 'fixed price' on a quote, it is worth understanding what the phrase commits the builder to, what it never commits them to, and where the honest uncertainty in every building job goes when it is not allowed to live in the price.

What the price actually fixes

In a genuine fixed-price contract, the builder carries the risk on everything inside the scope. If timber prices move, that is their problem. If the framing takes a week longer than they allowed, that is their problem too. They have priced the labour, the materials, the subtrades and their margin, and they wear the difference if their pricing was optimistic. That is the deal, and it is a good deal for you, because the person best placed to estimate building work is the person doing it.

This is why a proper fixed price is usually a little higher than a loose estimate for the same job. The builder is selling you certainty, and certainty has a cost. A builder who quotes low and makes it up later through variations is not cheaper. They have just moved the risk onto you without telling you.

It is also worth knowing what a fixed price does to behaviour on site. A builder working to their own number has every reason to plan the job well, order materials early and keep the programme moving, because drift comes out of their pocket rather than yours. Charge-up arrangements, where you pay the hours as they happen, can be fair on small or genuinely unknowable work, but they put the programme risk on you, and they reward nobody for finishing.

What it never covers

No contract fixes the price of things nobody has decided yet, or things nobody can see yet. Every fixed-price contract has edges, and the edges take a few standard forms.

• Variations. If you change your mind after signing, the change gets priced. That is fair. The thing to check is how it gets priced: our practice is that a variation is priced and signed before the work happens, never invoiced after, and any builder should be able to tell you their equivalent rule.
• Latent conditions. Rot behind the cladding, an undersized bearer, asbestos in the old lining. On renovations especially, no builder can fix the price of what the wall is hiding, which is why we do paid investigation before we price rather than guessing and arguing later.
• Exclusions. Every quote leaves things out: consent fees, landscaping, appliances, sometimes scaffolding or demolition disposal. Exclusions are fine when they are written in plain words. They are dangerous when they are implied.
• Provisional sums and prime cost items. These deserve their own attention, because they are the two words that quietly decide how fixed your fixed price really is.

The two words that matter

A provisional sum is an allowance for work that cannot be properly priced yet, such as excavation in unknown ground. A prime cost item is an allowance for something you have not chosen yet, such as tiles or tapware. Both are estimates sitting inside a document that calls itself fixed. When the real cost lands, the allowance is adjusted, usually with the builder's margin added on top of any increase.

A handful of these in a contract is normal. A contract full of them is an estimate wearing a fixed-price label. We have written a separate piece on how they work in detail, but the short version is this: count them, ask how each number was set, and ask what happens when the real figure comes in above or below the allowance. The answers tell you a lot about the builder as well as the price.

How to read the document itself

Residential building work of $30,000 or more including GST legally requires a written contract with prescribed disclosure information, so on any serious job there will be a document. Read the scope section against your drawings and specification. If something you care about is not named in either place, it is not in the price, whatever was said on the site visit.

Then read the variations clause and the payment schedule. The variations clause should say that changes are documented, priced and agreed before the work is done. The payment schedule should tie payments to progress you can see, not to dates on a calendar. Neither of these is exotic. A builder who resists putting them in writing is telling you something useful early, while it is still cheap to listen.

While you are in there, look for rates hiding in the margins. Some quotes carry an hourly rate or a schedule of rates for work 'outside the scope', which is reasonable, provided you understand that everything not written into the scope will be charged at those rates. The wider and clearer the scope, the less those rates ever get used. That is another way of saying what this whole article says: the scope is the contract, and the price is only its shadow.

On the contract form itself, most builders use a standard-form contract published by one of the trade associations or a lawyer's equivalent, rather than writing their own. Standard forms are generally a good sign, because the clauses have been argued over for years and the sharp edges are known. Whatever document arrives, read the definitions of variation, provisional sum and practical completion inside it, because those defined terms, not the marketing, are what you are agreeing to.

None of this is about catching anyone out. Good builders like tight contracts, because tight contracts prevent the arguments that ruin jobs for everyone. A fixed price built on a complete scope, a short exclusions list and honestly labelled allowances is one of the most valuable documents you will ever sign. The same words on top of a vague scope are close to worthless. The difference is in the detail, and the detail is worth an evening of your time before you commit.