Fixed Price vs Cost Reimbursement: How to Navigate Cost Fluctuations in Build Contracts
In today’s building market, terms like “cost fluctuation” and “fixed price” are popping up more frequently than ever before—and not always in reassuring ways. While fixed-price residential building contracts are still common, current market conditions have made them more complex than they appear at first glance.
Shipping delays, material shortages, a tight labour market, and inflation have all thrown wrenches into once-reliable contract structures. Homeowners signing contracts need to know: what’s truly fixed, what’s flexible, and how builders pass on cost increases. Let’s break it down.
What Is a Fixed Price Contract?
A fixed price contract is intended to offer cost certainty. It specifies a total contract price for the building work, which can only change through formal variations or adjustments. These can be triggered by:
Changes in the build scope (altering plans or specs)
Estimates (known as PC sums—more on these shortly)
Delays that shift financial risk to the owner
Price increases in materials, labour, or overheads (often triggered by fluctuation clauses)
Fixed price contracts aim to put the price risk on the builder. But as many recent homeowners have found, that risk isn’t as watertight as it once was.
Cost Reimbursement Contracts (a.k.a. Charge-Up Contracts)
Unlike fixed price contracts, cost reimbursement contracts don’t offer a final price upfront. Instead, you’re invoiced for actual costs as the project progresses—usually including:
Agreed hourly labour rates
Incurred material and trade costs
A pre-agreed margin (often a percentage)
While this model lacks upfront price certainty, it offers transparency. You can see exactly what’s being charged—and where it’s going. From a budgeting perspective, it’s less predictable. But for some projects, especially complex or evolving builds, it’s a more realistic way to manage costs.
What Are PC Sums (Provisional and Prime Cost Sums)?
PC Sums are placeholders in your fixed-price contract. They’re included when parts of the work or materials aren’t defined well enough to lock in a final price.
Provisional Sums cover work that hasn’t been fully scoped
Prime Cost Sums cover materials where the owner hasn’t chosen a final product
These sums are estimates that sit within the fixed price. If the final cost ends up higher, you pay the difference (plus builder margin). If it’s lower, you’re credited back—though the builder usually retains their margin.
PC Sums are useful because both parties agree from day one which aspects of the contract might change. There’s transparency, and any cost adjustment is clearly linked to a specific part of the build.
The Rise of Cost Fluctuation Clauses
Every standard residential building contract in NZ includes a cost fluctuation clause—though they’ve sat largely unused for decades. That changed when inflation and supply constraints made it harder for builders to absorb cost increases.
These clauses allow a builder to increase the contract price if their own costs rise—even under a “fixed price” contract. Some versions don’t require any evidence to be provided, which is where things can get murky.
In practice, these clauses can turn a fixed price contract into a quasi cost-reimbursement contract—just without the visibility. It can feel like a bait-and-switch: you sign thinking your price is locked in, only to find additional costs tacked on mid-build with little recourse.
And here’s the kicker: if the fluctuation clause isn’t tightly drafted or limited to specific elements, it can open the door for a builder to selectively apply it to whatever items they choose—without prior transparency.
Are PC Sums a Better Option?
In many ways, yes.
PC Sums are upfront about what’s uncertain. Both you and your builder know exactly which items may change, and you can plan accordingly. Banks used to frown on them, sometimes rejecting mortgage finance if PC Sums were included. Ironically, that’s led to an increase in less-transparent fluctuation clauses—which may be more damaging to homeowners in the long run.
Builders have sometimes been forced to remove genuine PC Sums to appease banks, only to rely on blanket cost fluctuation clauses later to recover their costs. A better approach would be to:
Identify uncertain parts of the build early
Allocate realistic PC Sums
Require evidence for any cost increases
Ensure both parties agree how margins are applied
This hybrid model retains the benefits of a fixed price for most of the build while still offering flexibility (and accountability) where it’s needed.
Why Blanket Fluctuation Clauses Are Problematic
Builders absolutely need protection from genuine cost spikes—especially in today’s climate. No one benefits from building companies going under. But overly broad cost fluctuation clauses, especially those lacking detail or documentation, can blur the line between fairness and exploitation.
Some of these clauses could even fall foul of the Fair Trading Act 1986 if they result in misleading conduct or unfair contract terms.
Homeowners should feel confident about what they’re signing—and not be surprised by costs they didn’t agree to. If you're faced with a contract that includes a broad cost fluctuation clause, push for clarification or suggest using itemised PC Sums instead.
The Bottom Line: Ask, Clarify, and Don’t Be Rushed
Contracts that combine fixed pricing with clearly defined PC Sums and robust cost evidence requirements are not only fairer, they’re also more likely to preserve trust throughout the build. Builders can still protect their margins, and owners can understand where their money is going.
So if you’re building a new home, take the time to review your contract carefully—especially any fluctuation clauses. Ask questions. Push for transparency. And wherever possible, structure your contract so that both parties know exactly what’s fixed and what’s flexible.
Mortgage Lab’s mission is to be the digital town square for financial decision-makers to gain knowledge about their current and future mortgage. Follow us on Facebook and LinkedIn or subscribe to our newsletter to be notified of our latest articles.