When should a trade business use cost-plus or fixed-price pricing?

The two models

A fixed price is a single price for the defined job. Business.gov.au notes that on longer fixed-fee contracts you can include a clause to review the fee if business costs rise. A cost-plus contract has the customer pay your agreed costs plus a fee or markup. Business.gov.au says the contract should state which of your costs the customer will pay.

Business.gov.au says the building and construction industry commonly uses stage payments in both fixed-price and cost-plus contracts, and to check the stage-payment rules with the relevant state or territory building authority or industry association.

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Worked example, all amounts excluding GST

This is our fictional example, not a market price. A builder agrees a fixed price of $16,500 for a bathroom renovation. The alternative is cost-plus: allowed costs plus a 10% fee on those costs, capped at $19,000. The table shows the contractor's result for three possible actual cost outcomes.

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What the example shows

Under fixed price the contractor keeps savings and absorbs overruns, so the estimate carries the risk. Under cost-plus the customer does not know the final total until costs are in, which is why a cap, cost records and approval steps matter. A percentage fee on cost also rises when costs rise, so agree how you will keep costs reasonable. These are our observations from the example, not source findings.

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Settle these before you sign

For cost-plus, our recommended checklist is: which costs are allowed and which are excluded, the fee or markup and what it is calculated on, the evidence you will supply (supplier invoices and timesheets), any cap, the approval needed for purchases above a set amount, and how often you invoice.

For either model, Business.gov.au says variations are best put in writing and agreed by both parties, with what is changing and the effect on cost and timeline. For building and construction work it says to check the relevant state or territory's rules for contract variations.

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Check local rules first

Each state and territory has security of payment laws that apply where the work is done. Check current local contract requirements before using cost-plus, particularly for work for homeowners, and settle any cost cap, evidence and variation process before signing.

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Common questions

What are the downsides of a fixed-price contract?

The contractor carries the risk if costs rise above the estimate. Business.gov.au suggests a fee review clause on longer contracts and says to consider whether you will fund materials from your own money while waiting to be paid.[1]

What are the downsides of using cost-plus pricing?

The final price depends on actual costs, so agree which costs count, what evidence the customer receives, how the fee is calculated and how changes are approved. Check the contract model permitted for your state and job before using it.[1][2]