Under a fixed price contract the builder commits to a set amount, keeps any saving and wears any overrun on the agreed scope, whereas under a cost plus contract the client pays the actual cost plus an agreed margin and keeps any saving themselves. Both are legitimate ways to build, and the right one depends on how settled the design is and on who should be carrying the risk. This article compares the two side by side, separates them from open book reporting, which is a different idea entirely, and sets out what happens when a design comes back over budget.
Key takeaways
- Under a fixed price building contract the builder keeps the saving and absorbs the overrun. Under a cost plus contract the client keeps the saving.
- A client on a fixed price contract run open book can watch a saving appear and still not receive it, because the contract decides who keeps it.
- Value engineering brings a design back into budget before contract, which is far cheaper than doing it during construction.
- NSW’s regulated contract rules cover residential building work. A commercial shed or warehouse contract is negotiated between the parties, so the terms matter more.
Fixed Price and Cost Plus, Side by Side
Under a fixed price contract the builder absorbs the variance in both directions, keeping a saving and wearing an overrun. Under cost plus the client absorbs it, paying less when the work costs less and more when it costs more.
| Fixed price | Cost plus | |
|---|---|---|
| Who keeps a saving | The builder, who contracted to a set amount | The client, who pays only what the work cost |
| Who wears an overrun | The builder, on the agreed scope | The client |
| Budget certainty | High, the number is known before work starts | Lower, the final figure is not guaranteed |
| Transparency of actual costs | Depends on whether it is run open book | Inherent, costs are passed through and verified |
| Best suited to | A fully drawn design and a settled scope | A moving scope, or a client who wants the upside |
What a Fixed Price Contract Commits the Builder To
A fixed price, or lump sum, contract commits the builder to complete the agreed scope for an agreed amount. The NSW Government’s guidance on building contracts describes a fixed price or lump sum contract as one where the builder agrees upfront to a fixed amount for the whole job, with unforeseen changes during construction potentially affecting the final cost. For the client, the appeal is certainty. For the builder, the discipline is that an overrun comes out of their own margin, which is why a fixed price is only as good as the pricing work behind it.
What a Cost Plus Contract Commits the Client To
Under a cost plus arrangement there is no guaranteed final cost. The same NSW guidance describes it as a contract where the client repays the builder for verified direct and indirect costs and fees at regular intervals, and notes it is often used where the nature of the project prevents a final cost from being calculated up front. The client carries the risk of the number moving, and in exchange receives the benefit if it moves downward.
Which NSW Rules Apply to a Commercial Build
The regulated contract rules and statutory warranties in NSW attach to residential building work, not to commercial projects. The guidance quoted above comes from the agency that regulates residential work, covering single dwellings, villas, houses and home units, and a commercial shed or warehouse build sits outside that regime. The definitions of the two contract types are the same, but the consumer protections, the prescribed contract terms and the statutory warranties that attach to residential work do not automatically apply to a commercial project. That is precisely why the terms of a commercial contract deserve proper attention, and why this article is an explainer rather than advice. Anyone signing should have their own solicitor or contract adviser review the document.
Who Keeps the Saving Is the Real Difference
Budget certainty and the upside are two sides of one coin: whoever is protected from an overrun is also the one who keeps a saving. That trade is the decision an owner is actually making, and it is set by the contract rather than by the builder.
Under Fixed Price, the Saving and the Overrun Are One Term
A builder who has contracted to a certain amount keeps the difference when the work comes in below it, and pays the difference when it comes in above. Those are not two terms that can be negotiated apart from each other, which is why a client cannot buy budget certainty and the upside at the same time. A client who wants complete certainty is, by definition, paying someone else to absorb the variance in both directions.
Under Cost Plus, What the Client Takes On to Keep the Upside
Under a cost plus building contract the client pays the verified cost of the work plus the agreed margin, which means invoices, supplier accounts and labour records become the basis of what is paid rather than an estimate. Two things come with that. The client needs the appetite to accept a final figure that was not set at the start, and someone on their side has to actually read what is being passed through. For a client who has both, a saving flows back to them rather than to the builder.
Why That Changes Which One You Should Ask For
The right question is not which contract is better, it is which risk the client would rather carry. A business borrowing against a fixed figure, or reporting to a board that needs a committed number, usually wants fixed price. A business with a settled relationship with its builder, some flexibility in the budget, and a wish to benefit from efficient buying usually does better under cost plus. Neither choice is a judgement about the builder.
Open Book Is Not a Contract Type, It Is How the Costs Are Shown
Open book and contract type are separate decisions that are often confused. The contract decides who benefits from a saving. Open book decides whether the client can see the saving happening at all.
What Open Book Means in Practice
Working open book means the client sees the costs as they are calculated, on the spreadsheets, alongside the contracted figure rather than only the figure itself. BLD works this way, opening the costings to the client and working through value engineering with them on that basis. It is a way of working rather than a legal structure, and BLD’s own description of it is simply an honest way to work.
Seeing Spend, Savings and Progress as the Build Runs
Alongside the costings, BLD gives clients access to Buildertrend, the project management software where they can see how costs are tracking, what has been spent and where savings are appearing as the build progresses. The value of that is not oversight for its own sake. It is that a client watching the numbers move can make decisions in time for them to matter, rather than learning about a variance after it has been absorbed.
Open Book Sits Over Either Contract Type
A fixed price contract can be run open book, and BLD does exactly that. The contract is still a fixed price, and the client still gets to see what is going on underneath it. The same visibility can sit over a cost plus arrangement, where it is closer to inherent, since the costs are being passed through and verified in any case. Treating open book as a synonym for cost plus is the most common mistake in this area.
Value Engineering, What Happens When the Design Comes In Over Budget
Value engineering is the process of changing what gets built so that it fits the money available, without giving up what the building actually has to do.
Design Modifications That Bring a Budget Back Into Range
Design modifications are what close the gap when a drawing comes back above the money available. Rather than the project stalling, BLD works through alternatives with the client to bring the figure back to the budget that exists. Which modifications are available depends entirely on the building, so the work happens around a drawing and against real costings rather than in the abstract.
Why Doing This Before Contract Beats Doing It After
Changing a design on paper costs drafting time. Changing it once the slab is poured costs the slab. Every value engineering decision gets more expensive as the project progresses, and the ones taken after contract usually arrive as variations, which are the least comfortable conversations on any build. Working the budget before signing keeps the decisions cheap and keeps them the client’s.
Working With One Selected Builder Instead of Going to Tender
Open book value engineering starts at the beginning of a project, with the client partnering with a selected builder rather than sending drawings out to several. Open tender is a reasonable route and a slower one, since every builder prices independently and the responses then have to be compared. Engaging one builder early lets the budget work happen alongside design rather than after it, which saves time and tends to produce a design that was built to the budget rather than cut back to it.
What Puts a Build Over Budget, and Who Pays for It
Program delays and labour rate movement put most builds over budget, not the contract. What the contract decides is who pays for that, and the causes are the same regardless of which one is in place.
Program Efficiency, and Why Time Is the Real Cost
Good time management is one of the largest cost controls on a build. A program that is not run efficiently keeps paying for the same weeks twice, in supervision, in plant, in preliminaries and in the cost of trades waiting on each other. Most budget overruns are program problems wearing a cost problem’s clothes.
Labour Cost Movement
Labour rate rises during a long program can cripple a project that was priced before them, and neither party controls them. What can be controlled is exposure, since a shorter program sits in the market for less time, and a contract signed close to the start of work is exposed to less movement than one signed months ahead of it. Who absorbs whatever movement does occur is decided by the contract type, and on a fixed price job it is the builder.
Who Pays When a Fixed Price Build Goes Over
On a fixed price contract, if the job goes over budget on the agreed scope, the builder pays the difference. What the client pays for is a change to that scope, which is what a variation is, and keeping the two apart is most of the discipline of running a fixed price job. BLD’s position is plain: most of its work is fixed price, so an overrun on scope comes out of BLD, and the response is to price carefully enough that it does not happen. The method behind that pricing, a quantity surveyor estimate tested against the trades, is set out in how a commercial builder actually prices a shed.
Where BLD Constructions Sits
BLD offers both contract types on sheds and warehouses and commercial projects, and runs fixed price work open book as a matter of course.
Both Contract Types, Offered Across Dubbo, Orange and the Central West
BLD offers both fixed price and cost plus on projects across Dubbo, Orange and the Central West, choosing per project rather than applying one as policy, because the right arrangement depends on how settled the design is and what the client needs from the number. Clients who come in early, before the design is locked, have the most options available to them, since both value engineering and the choice of contract are still open at that point. Projects that arrive with completed drawings and a firm budget usually resolve to a fixed price, run open book.
Free, Itemised Quotes and No Surprises
Quotes are free and carry no obligation, and clients receive a detailed, itemised quote with no hidden costs, broken down line by line. The principle behind both the quote format and the open book approach is the same one: no surprises and no guesswork, with the client able to see what they are paying for at the point they are deciding. Where this sits in the wider project is set out in BLD’s guide to the nine stages of a commercial construction project.
Frequently Asked Questions
What is a cost plus contract in construction?
A cost plus contract is one where the client pays the verified direct and indirect costs of the work plus an agreed margin, rather than a single pre-agreed price. There is no guaranteed final figure, which means the client carries the risk if costs rise and keeps the benefit if they fall. It is commonly used where the scope cannot be fully defined before work begins.
What is the difference between a fixed price and a cost plus building contract?
A fixed price contract sets the amount before work starts, so the builder keeps any saving and absorbs any overrun, whereas a cost plus contract passes the actual costs through to the client, so the client keeps any saving and carries any overrun. Fixed price buys certainty. Cost plus buys the upside, along with the downside.
Which contract is better for a commercial shed build?
Neither is better in general, and the useful test is how much of the scope is genuinely undecided. Where the design is fully drawn and the quantities can be measured, a fixed price is straightforward to give and straightforward to hold. Where significant parts of the scope are still open, a fixed price has to carry a contingency for the unknown, and the client pays for that contingency whether or not it is used. That is the case where cost plus can end up costing less.
What does open book mean when building a warehouse?
Open book means the client sees the costs as they are calculated rather than only the contracted total, usually through shared costing spreadsheets and access to Buildertrend, where spend and savings are tracked. It is a reporting approach, not a contract type, and it can sit over either a fixed price or a cost plus arrangement.
If a fixed price job is run open book, can the client see a saving they do not receive?
Yes, and it is worth understanding before choosing that combination. Open book shows the actual costs as they land, so a client may watch a job come in under the contracted figure while the saving stays with the builder, which is the arrangement they agreed to when they bought budget certainty. A client whose main aim is to keep savings should be asking about cost plus rather than about open book.
What is value engineering in construction?
Value engineering is reworking a design so it fits the available budget without losing what the building has to do. In practice that means testing alternatives, modifications and specifications against cost, usually before contract. It is not the same as cutting scope, and it works best when the builder is involved while the drawing can still change cheaply.
Do NSW building contract rules apply to a commercial shed?
No. The regulated contract requirements and statutory warranties in NSW attach to residential building work, such as houses and home units. A commercial or industrial build sits outside that regime and is governed by the contract the parties negotiate, which makes the specific terms more important rather than less. Anyone signing one should have it reviewed by their own solicitor or contract adviser.
The Bottom Line
The contract decides who carries the risk and who keeps the saving, and open book decides whether either is visible while it happens. Settle both before the design is locked, because that is the point at which the client still has every option available and the cheapest version of every decision still on the table.
Planning a shed or warehouse build in Dubbo, Orange or the Central West?
Phone BLD Constructions on (02) 6884 1890 to talk through which arrangement suits the project. BLD Constructions has built across the Central West since 2004, holding NSW Licence 213455C, Master Builders Association membership, and the Master Builders Western Regional Excellence Award in both 2023 and 2024. BLD’s commercial and industrial work spans Dubbo, Orange, Bathurst, Parkes, Forbes, Cowra, Mudgee, Wellington, Narromine and the wider Central West, with single-source project management and real-time tracking through a 24/7 Buildertrend client dashboard. Every BLD project carries a 100% customer satisfaction guarantee.
This article is general information about how building contracts work and is not legal or contractual advice. Contract terms should be reviewed by your own solicitor or contract adviser before signing.
References
- NSW Government, Consumer Building Guide
