Fixed price contracts are the most common form of domestic building agreement. As the name suggests a fixed price agreement is where the builder agrees to perform building work for a fixed sum. This provides a degree of certainty to both parties, but during a period of escalating costs the builder is likely to include a risk premium into the contract sum for unexpected cost escalation during the construction period. Moreover in a fixed price contract there are usually a number of estimates or “provisional sums” for items such as siteworks which cannot be determined exactly at the time of signing a fixed price contract.
Under the Home Building Contracts Act, a builder cannot just take a wild guess about the cost of items such as siteworks, but is required to make inquiries and insert a reasonable figure. This is to ensure that the builder does not keep the estimate for, say, siteworks artificially low and provide a false impression to the homebuyer as a means of inducing the buyer to sign the building contract. On completion of the provisional sum items, depending on the final cost, the homebuyer may have to pay an additional sum or may receive a credit.
Fixed price contracts generally allow for variations to the building work during the construction process. The contract will provide the way in which variations are to be valued and the contract price will be adjusted accordingly. If more work is done, the builder is entitled to be paid and the contract price will be adjusted upwards. If work is omitted, the owner may be entitled to a reduction in the contract price.