Fixed Price Building Contract – What you Need to Know

home floor plans with ruler and pen Renmark Homes often get asked if the contract to build a home is a fixed price building contract. Under Victorian law building contracts are fixed price. There are some exceptions to this such as a cost plus contract.

That said why does the end price more often than not, cost more than the contract price?

There are a number of reasons the fixed contract changes.

Firstly the contract price is fixed, to the extent that any price increases of builders materials and contractors cannot be passed back to you, the owner.

This gives you the peace of mind that the contract price will not go up due to fluctuations in the price of materials and building labour.

Secondly the contract has an up-front fixed price for the fixtures and fittings specified in your building contract. So should an item you selected increase in price, the price increase cannot be passed back to you.

So why does the contract go up if materials, contractors and specified items are fixed, you ask.

These are the factors that cause the contract price to increase even though you are building with a fixed price home building contract.

  1. Customer requested changes. (variations)
  2. Provisional sum and prime cost adjustments.
  3. Unforeseen in ground issues such as rock, engineering omissions, inspector directions.

Believe it or not the one single factor that causes the price to increase is customer requested changes.

When people choose to build a custom home they do so because they wish to build a home that suits their lifestyle and functions in a house to support that. It’s a different building process to a display home as a custom home is architecturally designed to personal taste.

Compare this to volume builders, where the choice of inclusions is limited or removed totally from the owners’ control and you don’t have the luxury of personal choice.

What we have found is when a customer chooses to build a custom prestige home, personal choice is very important so you can build a home that is truly yours and price often plays a secondary role.

Because we work so closely with our clients, we allow a lot of input during the build. Thus, as the home progresses it is more than likely that our building clients will request changes to their original inclusions.

These changes are generally for a higher quality or more luxurious item, which costs more and increases the contract price. These changes are referred to as upgrades, and are treated as a variation to the fixed price contract.

The more upgrades requested, the more the contract price will go up. Many of our clients know this, and are happy to agree to upgrades as it is their personal choice.

The main areas of customer building variations are spent in the following areas:
  1. Joinery (kitchens and cabinets)
  2. Kitchen appliances
  3. Floor coverings
  4. Heating and cooling
  5. Stairs
  6. Sanitary fixtures and fittings

With luxury custom homes we see many of the items above listed in the contract as an allowance. An allowance can be either a prime cost item or a provisional sum item.

Provisional Sum (PS)

A Provisional Sum, more commonly known as a PS, is an allowance that the builder has made to complete a task under the contract. It covers labour only or labour and materials. They are useful when the final selections have not been completed or it is simply not possible to include in a quote due to factors that are unknown at the time of the contract signing.

Prime Cost Item (PC)

Much like a Provisional Sum, a prime cost item is a dollar figure allowance used in building quotes and contracts. It’s an allowance for materials such as appliances, sinks, taps etc.

Essentially a dollar budget where the final selection of those items is still to be confirmed.

Note that the allowance for a Prime Cost item only covers the supply of that item. Any labour associated with the installation of that item should either be included in the contract or listed separately as a provisional sum.

As both these allowances do change depending on your final selection they can incur additional costs.

When building luxury custom homes provisional sums and prime cost allowances are inevitable due to the nature of the design and your inclusions.

That said some home builders will include unrealistically low allowances in their building quote so that their price appears much lower than their competitors, in the hope you’ll make a decision purely based on the price.

These builders know that if there was any error in the final costs, they will be passed directly onto you, the client, which means they have no risk or responsibility and the potential for over-runs is greatly increased.

Expertise in Architecturally Designed and Built Homes

Custom homes can be complex to build and require a high degree of expertise from a suitably qualified builder such as Renmark Homes.

Although a reputable builder would have factored all structural costs into your contract price, it is not unusual in large custom homes that have a lot of structural steel and timber to require further changes to be made on site.

Such changes could be the result of inadequate information on the plans, omissions, or something the inspector is not completely satisfied that’s adequate.

Changes to a plan of this nature are considered a variation and often the costs to rectify the issue will be borne by the owner.

Complex architectural homes may come with complex architectural features. Such features are often difficult to price and engineer and as such may be in your contract as a provisional sum and adjusted once the work is complete.

Such adjustments can add to the contract price.

Another area for potential cost overruns under a fixed price contract are the contract exclusions.

Although most builders will include most things to complete your home, there still may be a number of exclusions to the contract.

The most common of these is the rock exclusion.

A rock clause is something you’ll find in most building contracts.

It is there to protect the builder from unforeseen circumstances like hitting rock during the excavation. The rock clause applies to fixed price contracts.

Because rocks are so difficult to deal with in the removal and dumping they can incur considerable costs if encountered in large quantities.

Most people understand the rock exclusion clause but might not fully understand the flow-on effect that rocks can have to the works preceding their removal.

For example, rocks can impact the in-ground plumbing and slab costs.

Bulk concrete is another area that is generally excluded from the contract price.

When a builder prices up your home, he relies on the documentation to determine how much concrete your foundations will require.

If all goes as per plan, bulk concrete charges would rarely be an issue. However rocks can have a big impact on the amount of concrete used and as such not only can you incur rock charges, but also bulk concrete charges as a result of the rocks.

Keep in mind, that only a relatively few sites have big issues with rocks, and if the site does have rock it should be listed on the soil report so you would be aware of it.

If your site is showing rock on the report, you may not be able to avoid it, but you can certainly prepare for it.

Other exclusions could be things such as services, site costs and landscaping.

It is very important that you are aware of your exclusions so you can plan for them should they arise.

In closing, although contract overruns are common a few simple steps can be taken to try and minimise the impact of these.

  1. Select as many of your fixtures, fittings and appliances before contract signing so they are specified and included in your contract price.
  2. Familiarise yourself with excluded items and see if there’s any way you can include some or all of these in the contract price.
  3. Remove as many ambiguities as possible from the specification.
  4. Use reputable designers and engineers to remove as much as possible any structural issues that might present on site.
  5. If you’re on a tight budget, try and simplify or remove complex architectural features that will not impact the liveability or functionality of your home.
  6. Have a contingency amount put aside so should over runs occur they will be less stressful because you at least have planned for them.

If you would like to discuss your custom home and a fixed price building contract, feel free to call us to discuss our consultation process.