Lump Sum Contract v Cost Plus Contract

Lump sum contracts, also known as fixed price contracts, are the most used contracts in the construction industry. For residential builds, a lump sum contract is where a builder will build a house for an owner on a fixed contract sum that the parties agreed on at the time of the contract. When calculating the contract sum for a lump sum contract, the builder should have factored all the costs for building works including the labour, materials, and any profits. The nature of the lump sum contract is that the builder will complete the contract works for the sum stipulated in the contract and bear the risk of underquoting or losing out on profits. An advantage of using a lump sum contract is that it is much simpler to administer and save administrative costs and processes compared with the cost plus contract.  A lump sum contract is also the preferred contract where a lending authority is involved.

Due to inflation and ongoing price increases in building materials and labour, cost plus become more welcome to builders. It is important to note that the cost plus contract is not a fixed price arrangement. A cost plus contract is where the builder will claim the costs on a “do and charge” basis. The advantage of using a cost plus contract is that the builder can pass on all the costs for carrying out building works. The disadvantage is that the administrative process can be costly and excessive. For instance, the MBA ACT cost plus contract requires the builder to provide a budget report to detail the progress of work including work performed and to be performed. The builder may also be required to include in the budget report money paid or payable. The budget report may be provided to the owner on a monthly basis or when requested by the owner. The cost plus contract also requires the builder to provide proof of costs when making payment claims, whereas this is not required in a lump sum contract.

MBA ACT has updated our Home Building Contract (lump sum contract) and has released the updated version. If you have recently purchased a hard copy of the Home Building Contract at our reception and the contract has not been used, you can exchange your old version free of charge at our reception in Fyshwick. Members are encouraged to use the most up to date MBA contract as the new version includes changes made to comply with new legislative changes and are more suitable for the current climate in the construction industry.

Members can access and purchase the new ACT Home Building Contract (lump sum) and ACT Cost Plus Residential Building Contract through eDocs.

If you are unsure of which contract to use or need assistance in understanding any contract terms, please reach out to our Workplace Relations and Legal Team on 02 6175 5900.