Quick answer
Construction lenders strongly prefer a fixed-price building contract, because it lets them check that the loan plus your equity covers the whole job. Cost-plus contracts leave the final cost open, so many lenders won't fund them or will want much more of your own money in first. In Victoria, cost-plus domestic contracts are only allowed above $1 million, with a narrow renovation exception.
Key points
- Lenders size a construction facility on a known cost to complete, which a fixed-price contract provides.
- Cost-plus contracts shift cost risk to the owner, and many lenders won't fund them for small projects.
- In Victoria, cost-plus domestic building contracts are permitted only above $1 million.
- Prime cost and provisional sums are where a fixed price quietly becomes less fixed.
- Variations should be in writing and costed before work starts, or the lender may not fund them.
A construction lender will almost always fund a fixed-price building contract more readily than a cost-plus one. The lender’s whole job is checking that the loan plus your own money covers the entire build. A fixed price gives them a number to test. Cost-plus leaves the final bill open, which means more equity, tighter conditions or a polite no.
For small developers putting up a duplex, a few townhouses or a small commercial building, that choice of contract often decides whether the project is fundable at all, so it’s worth getting right before the builder sends paperwork to sign.
What’s the real difference between the two contracts?
Fixed-price (lump sum). The builder agrees to build what’s on the plans and specifications for a set price. The price can still move, but only through set mechanisms: variations you agree to, and adjustments to prime cost and provisional sum allowances.
Cost-plus. The owner pays the builder’s actual costs of labour and materials plus a margin or fee on top. There’s normally an estimate, but no cap. If costs rise, the owner pays.
| Fixed-price | Cost-plus | |
|---|---|---|
| Who carries cost risk | Mostly the builder | Mostly the owner |
| What the lender can test | A set contract sum | An estimate only |
| Lender appetite for small projects | Strong | Limited |
| Equity a lender typically wants | Standard for the project | More, to cover the unknown |
| How the price moves | Variations, PC and provisional sums | Every cost passes through |
Why do construction lenders prefer a fixed price?
Every construction facility rests on one test: at every stage, does the undrawn loan plus anything the developer still has to contribute cover the cost to finish? An independent quantity surveyor checks this at the start and before each draw.
With a fixed-price contract the surveyor can compare the contract sum against what’s been claimed, look at the allowances and form a firm view. With cost-plus, the surveyor is checking an estimate the builder isn’t bound by. If materials or labour run higher, the gap lands on the developer, and the lender has no way to know how big it might get.
That’s why lenders who will look at cost-plus usually want a bigger contingency, more of the developer’s own money in first and a more experienced developer. For many small residential jobs, it simply isn’t worth it to them.
Whichever contract you sign, expect the lender’s surveyor to ask for the same core pack: the signed contract with every schedule, the full plans and specifications, the builder’s itemised cost breakdown, the list of PC and provisional allowances, the payment schedule by stage, the builder’s licence and insurance details, and any consultant reports the price relies on, such as soil or engineering. A fixed-price contract with a tidy breakdown gets through that review quickly. A cost-plus estimate tends to generate a longer list of questions, because the surveyor is trying to work out how much the number could move and who would pay if it did. Sending the full pack up front, rather than in pieces, is one of the simplest ways to shorten the time between approval and the first draw. Our page on construction and development finance covers the cost-to-complete test in more detail.
Are cost-plus contracts even allowed for my project?
It depends on your state and the type of work. Victoria is the clearest example. Consumer Affairs Victoria explains that, from 1 August 2017, the threshold above which cost-plus contracts are permitted rose to $1 million. Below that, a domestic cost-plus contract isn’t allowed. For renovations of an existing home, a cost-plus arrangement can only cover the investigative work needed to establish the contract price, and a fixed-price contract then covers the rest.
Victoria also limits cost escalation clauses. Its guidance on preparing a major domestic building contract says such a clause isn’t allowed unless the contract price is more than $500,000 and the Director of Consumer Affairs Victoria has approved the clause, and notes that no clauses had been approved. It also says builders should build expected inflation and wage rises into the fixed price. The same page flags that Victoria passed domestic building contract reforms in September 2025, so read the live version before you sign.
Other states have their own rules for domestic work, and commercial building contracts follow different rules again. Your lawyer should confirm what applies to your job.
Where does a “fixed” price quietly become less fixed?
Small developers often sign a fixed-price contract and assume the number is locked. Three things can still move it.
Prime cost (PC) sums. Allowances for items you’ll choose later, such as appliances, tiles or tapware. Choose above the allowance and the price rises.
Provisional sums. Allowances for work whose extent isn’t known when you sign, like excavation in rock or extra piering. If the ground is worse than expected, the price rises.
Variations. Changes to the work after signing, whether you ask for them or something on site forces them. In Queensland, the QBCC says a variation must be put to the owner in writing, state the change to the contract price and give the builder’s reasonable estimate of any delay. The builder can’t require payment for a variation before the variation work starts.
Lenders read the allowances closely. A contract with a lot of the price sitting in provisional sums looks more like cost-plus than its label suggests, and the surveyor may ask for a bigger contingency to compensate. Our guide on construction loan variations covers how lenders handle changes once the build is underway.
If you’re comparing builder quotes now and want to know how a lender would read each one, send us a quick outline. There’s no credit check to enquire.
Illustrative example: two quotes for the same three townhouses
Illustrative only. A landscaping business owner holds a site approved for three townhouses. Two builders quote.
Builder A offers a fixed-price contract at $1.5m, with $60k of PC sums for kitchens and bathrooms and a $40k provisional sum for site works. Builder B offers cost-plus with an estimate of $1.38m.
Builder B looks cheaper. But the construction lender’s surveyor can test Builder A’s number and sign off on a cost to complete. With Builder B, the lender asks for an extra $200k of the owner’s own money as a buffer before the first draw, because nothing caps the final cost.
The owner signs with Builder A, picks finishes within the PC allowances and sets aside $75k as a personal contingency, funded by a property-secured loan over a commercial unit the business owns. When rock turns up during excavation and the provisional sum overruns by $30k, the contingency covers it and the draws keep flowing.
How do you make either contract easier to fund?
- Ask for a fixed price where you can. Even with a slightly higher headline, it usually unlocks a better finance outcome.
- Keep provisional sums realistic. Get soil and site reports before the builder prices the job so allowances aren’t guesses.
- Make PC selections early. Choose finishes before signing and ask for allowances that match them.
- Hold a contingency outside the loan. Cash, or an approved facility over other property, so a surprise doesn’t stall the draws.
- Get every variation in writing. Priced, agreed and sent to your lender before the work is done.
- Match the contract to the builder’s warranty cover. On residential work, the warranty certificate needs to line up with the contract value.
If the build is part of a builder’s own business growth, our builder business loan page covers how lenders look at the contractor’s side. And when a contingency needs funding, a private mortgage or other secured business loan over property you already own can sit alongside the main facility.
Contract locked in? Let’s look at funding the gaps
A clean fixed-price contract makes a small development far easier to fund, and it shows a lender you run the project like a business. If you need help with the deposit, a contingency, land or a top-up, we can look at property-secured options from $20k to $5m over residential or commercial security.
It takes around 60 seconds to tell us about the project, and there’s no credit check when you first enquire. We won’t send your details to a pile of lenders. A real person reviews the contract type, budget and security you describe and calls you to talk it through. Please keep the figures accurate, including the contract price, land value and any existing loans, so we can match the right option the first time.
Frequently asked questions
Will a lender fund a cost-plus building contract?
Some will, mostly on larger commercial jobs with experienced developers, but many won't for small residential projects. If they do, expect them to want a detailed estimate, a bigger contingency and more of your own money in before the first draw, because the final cost isn't capped.
Are cost-plus contracts legal in Victoria?
For domestic building work, Consumer Affairs Victoria says cost-plus contracts are permitted only where the contract is above $1 million. For renovating an existing home, a cost-plus arrangement can cover only the investigative work needed to set the contract price, with a fixed-price contract for the rest.
Can my builder add a cost escalation clause?
In Victoria, Consumer Affairs Victoria says a cost escalation clause in a major domestic building contract is not allowed unless the contract price is more than $500,000 and the clause is approved by the Director, and that no clauses had been approved. Victoria passed further reforms in September 2025, so check the current rules before you sign.
What are prime cost and provisional sums?
They're allowances in a fixed-price contract for items not fully priced yet. A prime cost sum covers an item to be selected later, such as tapware. A provisional sum covers work whose extent isn't known, such as rock excavation. If the real cost runs over, the price goes up.
Do lenders fund variations?
Usually only if the variation is documented, priced and approved before the work is done, and the remaining loan still covers the remaining work. Otherwise the developer pays for it from their own funds.
Is a fixed-price contract always cheaper?
Not necessarily. Builders price risk into a fixed contract, so the headline can be higher. What it buys you is certainty, and certainty is what makes a construction facility fundable.