Building Contracts: Fixed Price vs Labour Only


Fixed price contracts help you avoid nasty financial surprises.

What’s the difference between a fixed price contract and a labour-only contract?

Often a labour-only contract looks attractive at the start. But you are reliant on the builder’s estimate of time and a blowout in time results in a blowout in costs. A labour-only contract requires you to have at least 40% deposit.

NewBuild recommends and requires a fixed price build contract (FPBC). ‘Fixed price’ contracts predetermine the total cost so you are not caught by surprise. Ensuring your builder offers a fixed price contract is an important tool to ensuring you stay within your budget.

What to look for in a building contract:

Always seek independent legal advice prior to signing a build contract.

Included with your building contract will be a set of plans and specifications. Your build contract is simply a promise to deliver what is in your plans and specifications. So before you sign your contract:

  • Review your plans and get a detailed list of specifications – ensure they don’t conflict
  • Review your contract, especially for omissions or Provisional Cost sums, or Owner's Care items to ensure you are getting what you thought you were getting (PC sums should be accurately quoted in advance and should not deviate more than 10% from those estimates)
  • The most likely cost overrun in any build contract will be site works, foundation and retaining walls. Make absolutely sure this is accurate and if possible fix these costs
  • Look for inequities such as penalty clauses against you but not against your builder for non-performance
  • Consider if your contract has an exit clause if the builder simply stops performing
  • Ensure you can meet the commitments of your build contract as compared to your loan

NewBuild recommends the following clauses be added to your building contract:

In nearly all instances your bank’s loan conditions (especially the progress payments) will conflict with your building contract. Banks have rules around how much they will advance against a section, how much they allow as deposit and how much they are willing to pay for a build progress claim. And in some instances, they can even stop making payments if they are not satisfied. So while your bank may win the battle in any conflict between your build contract and the loan
contract,  the client almost always loses.

At this point you have two legally binding agreements – with potential for serious conflict. To help avoid this conflict NewBuild encourages you to ensure these three clauses are added to your build contract – even if you choose another bank

  • All deposit and progress payments are to be made in accordance with the lender’s guidelines
  • Practical Completion shall include the Code Compliance Certificate and the Valuer’s Completion Certificate, in accordance with the lender’s guidelines
  • The contract is conditional upon the lender’s acceptance of the build contract, and a formal bank loan has been approved to build