Why Fixed Price Building Contracts Change

house floor plan design with ruler

Building your new custom home will be one of the biggest financial investments you will ever make. The building industry is full of jargon and terminology that can be confusing and sometimes misleading if your builder doesn’t take the time to explain it to you.

And when things go wrong, which they can do, seemingly small misunderstandings can turn into expensive and time intensive challenges to be overcome.

We have written this blog to demystify some of the main building jargon we see used and highlight some of the main variations to contracts that cause fixed prices to change.

What is a Fixed Price Building Contract?

A fixed price building contract is exactly as it sounds – a fixed amount that covers the labour and materials required to complete the total build or scope of works. It is a lump sum and by definition cannot be changed regardless of any changes to the costs the builder may incur for completing the job once the contract is signed. For example, if the price of materials increases after a fixed price contract has been signed, the cost cannot be passed on to the client.

Yet, even when a contract is labelled ‘fixed’, the final price often ends up being higher than the contract price. So how does this happen?

There are 3 main reasons the fixed contract price changes.

1. Customer requested changes.

Also known as variations, this is the most common reason we see changes to the final price of a building contract. This is particularly the case for custom prestige homes where personal choice is very important to our clients and price often plays a secondary role to personal choice.

As custom builders, we work closely with our clients to give them the freedom to customise their inclusions and ensure they are kept involved in the build as it progresses. Often, as the build progresses our clients will request a change to their original inclusions, usually to higher quality, more luxurious items, which cost more and thus increase the cost of the contract price.

These changes are referred to as upgrades and are treated as variations to the fixed price contract. The more upgrades requested, the more the contract price will go up. A good builder should keep their clients well informed of the variations caused by upgrades so there are no surprises to the final price.

The 6 most common areas we see clients make upgrades to inclusions that cause variations to the contract price are:

  1. Joinery (kitchens and cabinets)
  2. Kitchen appliances
  3. Floor coverings
  4. Heating and cooling
  5. Stairs
  6. Bathroom fixtures and fittings.

2. Provisional sum and prime cost adjustments.

In custom built homes, we see many of the items listed above in contracts as allowances. Allowances are listed in building contracts as either prime cost items or provisional sum items. It is important to understand how both of these provisions work as they can impact the final contract price depending on your final selection.

Provisional Sum Item (PS)

A Provisional Sum (PS) is an allowance that the builder has made to complete a task under the contract. It can cover labour only, or labour and materials. A PS is often used when the final selections have not been completed or it’s 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)

A Prime Cost (PC) item is a dollar figure allowance used in building quotes and contracts for materials such as appliances, sinks, taps etc, where the final selection of those items is still to be confirmed. Note that the allowance for a PC 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.

When building luxury custom homes provisional sums and prime cost allowances are sometimes inevitable due to the specialised nature of the design and inclusions. That said, some home builders will include unrealistically low allowances in their building quote to create the illusion of a much lower price than their competitors. Be mindful of making a decision based purely on cost when building contracts include PCs and PSs – it pays to ask questions and do some digging to understand where the numbers are coming from.

3. Unforeseen issues that require specialist equipment and skills to resolve.

Contract exclusions are another common cause of cost overruns under a fixed price contract. An exclusion clause aims to limit the liability of one party to a contract, and in this case, protect the builder from unforeseen circumstances. A common example of this in a residential building contract is a rock clause, which protects the builder in the event of hitting unexpected rock during the excavation of your site.

Because rocks are so difficult to deal with in the removal and dumping, they can incur considerable costs if encountered in large quantities. The clause covers the builder for all additional costs that may be incurred as a result of all the materials and activities it takes to address that situation so that your build can proceed.

Complex custom architectural homes usually come with complex architectural features. it is not unusual in large custom homes to have a lot of structural steel and timber which require further changes to be made on site. Such changes could be the result of inadequate information on the plans, omissions or oversights in the design process, or something that does not satisfy the building inspector.

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. Custom homes can be complex to build and require a high degree of expertise from a suitably qualified builder to ensure that, as much as possible, everything goes to plan.

6 tips to avoiding variations in a building contract.

  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 ensure drawings are high quality and meet specification to help mitigate against any possible structural issues that might present on site.
  5. If you’re on a tight budget, try to simplify or remove complex architectural features that will not impact the liveability or functionality of your home.
  6. Have a contingency amount set aside in your budget to accommodate any unforeseeable variations should they occur.

Custom architectural homes can be complex to build and require a high degree of expertise from a suitably qualified builder such as Renmark Homes. The best advice we can give you to help avoid variations and surprises in your contract is to work with a quality, reputable builder who has experience building the style and complexity of home you are looking to achieve.

Ready to discuss your custom home and a fixed price building contract? Call us today on 1300 367 245 to discuss our consultation process and build it your way with Renmark Homes.