Which One Should You Be Using?
The Short Read:
Fixed price quoting, flat rate pricing, cost plus, time and materials, do-and-charge, day rate, hourly rate – there are numerous names for how you charge your customers for the work your business does but they basically fall into two types – fixed price quotes where you agree a fixed price for a fixed scope of work and cost plus where the scope is not fixed and it costs your client based on how long your team takes and how much stuff they buy.
They are both valid but one is the big boys method and one is not. One means you take on the risk and you have a clear structure and rules about when the price has to change – protecting your customer from unexpected blow-outs (Fixed Price). The other punts the risk down the road and onto your customer – “if the scope changes or our estimate of costs was wrong, bad luck, you’ll pay more”. That might sound better for you but it isn’t – it opens the door to disputes and problems later. It feels safer now but it definitely isn’t.
Guess which one I think you should do?
The Long Read:
How do you manage pricing your jobs? Do you prepare a fixed price quote or do you give an estimate but provide your services on a cost plus basis? Which is best? Which is the right way to do it?
I daresay you won’t be surprised to hear that I have a strong opinion on the matter. And you probably won’t be surprised when I tell you what it is.
Let me compare the two, explain why tradies tend to prefer one over the other, and then tell you a story about how the wrong choice can go very badly indeed.
What Is Cost Plus Pricing?
Cost plus pricing (also called “time and materials” or “hourly rate work”) means your customer pays for however long the job takes at your hourly rate, plus materials, subcontractors, and your margin. You might give them an estimate upfront, but that estimate is not a commitment. What they actually pay depends entirely on how the job unfolds.
With cost plus, you give your customer an estimate of the cost of the job (or you might not, it’s not necessarily part of the deal) but what they pay is how long it took at your hourly rate, plus materials and subcontractors, plus your margin. The name says it all, really.
People like doing work on this basis because you’re unlikely to lose out. The job takes as long as it takes and you charge that to the customer. They pay for your time and for the materials used and it’s all fair and reasonable. As far as pricing goes, it feels like a low-risk way to manage things. It’s especially attractive if the job is difficult to price, isn’t it?
You don’t have to commit to a price and risk that the job takes longer than you allowed. You don’t have to sweat over your estimate. If it blows out, the customer wears it. Simple. Except it’s not simple at all, and I’ll get to that in a minute.
The other thing worth noting here is that cost plus pricing can quietly hurt your margins even when it feels safe. If you’re not across your numbers, it’s easy to underprice your hourly rate, forget to mark up materials properly, or miss subcontractor costs entirely. If you’re not sure where you stand on that, have a read of understanding your numbers in your trades business because it matters more than most tradies realise.
What Is Fixed Price Quoting?
Fixed price quoting means you commit to a specific price for a specific scope of work. You estimate the time, materials, and subcontractor costs, add your margin, and present a number. That number is what the customer pays, regardless of how the job actually unfolds. The risk sits with you.
Fixed price quoting can feel terrifying, particularly if the job is difficult to estimate. If there are unknowns, or things that could surface as you work through the job, those could end up costing you more money without you being able to charge more for them.
That’s the fear, anyway. And it’s a legitimate fear if you’re not quoting properly. But here’s the thing: the solution to that fear is not to switch to cost plus. The solution is to get better at quoting, and to build the right conditions and variation clauses into your fixed price quotes. More on that below.
A well-structured fixed price quote gives both you and your customer a clear, written record of what’s included and what isn’t. It forces the conversation about scope upfront, before anyone picks up a tool. That’s a good thing, even if it takes a bit more work on your end.
For a broader look at how pricing connects to the risk you carry in your business, the Price Vs Risk Series is worth your time.
Is Fixed Price Quoting Always Better Than Cost Plus?
Yes. Fixed price quoting is the right way to price a job, every time. There is no situation where cost plus is genuinely better for your business. There is only your fear of getting something wrong, or of something unexpected coming up and biting you. That fear is real, but it’s not a reason to pass all the risk onto your customer without them properly understanding what they’ve signed up for.
Fixed price quoting brings certainty to the situation, as much as is possible given the circumstances. It brings certainty with certain conditions (variations, unforeseen work, exclusions). Your customer knows what they’re paying. You know what you’re building or installing or fixing. Everyone is on the same page.
Cost plus, on the other hand, brings no certainty at all. It’s a bit like asking how long is a piece of string. With fixed price, the risk is on you. You’ve committed to doing it for a fixed price and if you got something wrong, that’s on you. With cost plus, the risk is with your customer. You’ve given an estimate because you’re being helpful, but if you’re wrong, it’s the customer’s problem. They have to pay (but it won’t be good for your relationship or your reputation).
The trouble, of course, lies in the communication. It’s rare that a customer hears an estimate and truly understands the difference between that and a fixed price quote. Documentation on cost plus jobs tends to be loose, sometimes almost non-existent. So you’re thinking one thing and the customer is thinking something a bit different. Mostly that’s fine, until it isn’t.
When it goes wrong, it goes properly wrong. Disputes. Unpaid invoices. Damaged relationships. Work done that never gets paid for. All of that.
If you’re also making some of the more common mistakes in your trades business, the combination of loose pricing and those other issues can really compound things. Have a look at the 5 biggest mistakes you might be making in your trades business and see if any of them sound familiar.
A Story About How Cost Plus Can Go Wrong
This is the story I promised. It shows exactly how it unravels.
I have a client, a builder. He built an extension and renovation for someone on a cost plus basis. The customers had a budget of $400,000 and his estimate for the job was around that figure. He was careful to point out to them that, if they uncovered anything unexpected once work started, there would be additional costs. They understood. Or they said they did.
You can see where this is going, can’t you?
Sure enough, the cladding came off and rot or termites or something were found underneath. A plan was discussed, the remedial work was agreed on and carried out, all above board. But as the job moved closer to completion, the customers started to run out of money. There was more work still to do than they had money to pay for.
The customer was still mentally wedded to a $400,000 build, despite open and ongoing communication about the extra costs. It didn’t end well. No testimonials from those people. Not only that, the builder had to wear some of the cost of getting the job to a stage where he could stop work without going over the $400,000, so he lost money, too.
A fixed price quote with clear variation clauses wouldn’t have solved their budget problem, but it would have made the problem obvious sooner and in writing. A solution could have been found before the work was done and the money was spent. That’s the difference.
This is also where getting paid promptly becomes really important. On a long cost plus job where the customer’s finances are shaky, you can end up well and truly exposed. Getting paid sooner is something every tradie should be thinking about, regardless of how they price.
What About Thin Margins on Fixed Price Work?
One thing tradies worry about with fixed price quoting is that they’ll cut their margins too fine trying to win the job. It’s a fair concern, but it’s separate from the question of whether to quote fixed price in the first place.
If your margins are thin, the answer is to fatten your margins, not to abandon fixed price quoting. Thin margins on cost plus work are just as painful, and they’re harder to track because your costs are all over the place from job to job.
According to research from the Australian Small Business and Family Enterprise Ombudsman, cash flow and pricing issues are among the top reasons small trade businesses struggle. Getting your pricing structure right from the ground up is one of the most important things you can do.
How Do You Handle Unknowns in a Fixed Price Quote?
The answer is not to switch to cost plus. The answer is to build variation or exclusion clauses into your fixed price quote that specify what is and isn’t included, and what happens if unexpected work is uncovered. That way, you still give the customer a firm price for the known scope, but you have a clear, written process for dealing with surprises.
This is something a lot of tradies haven’t formalised, and it leaves them vulnerable on both sides. Without variation clauses, you either wear the cost of unexpected work yourself or you try to add it to the bill at the end, which is exactly where disputes come from.
According to Master Builders Australia, variation disputes are one of the most common sources of conflict between contractors and clients. The fix is documentation, not a different pricing model.
It’s also worth thinking about how comfortable you actually are with risk, because that shapes how you quote and how you manage jobs. The piece on whether you’re comfortable with risk is a useful read here.
Should You Ever Add Extras or Upsell on a Fixed Price Job?
Yes, and there’s a right way to do it. If you’re on a fixed price job and you identify additional work the customer would benefit from, you raise a variation or a separate quote. You don’t just do the work and add it to the bill. That’s the difference between a legitimate upsell and something that looks like a rip-off.
Done properly, upselling on a fixed price job is completely above board and good for your business. It gives the customer options, it grows the job value, and it keeps everything documented. If you’re unsure where the line is, the piece on whether it’s an upsell or a rip-off is worth a read.
The Bottom Line
If you’re quoting and working on a cost plus basis, please stop. Move to fixed price quotes for a fixed scope. Build your variation clauses in. Document everything. You won’t regret it.
I’ll talk about how to manage a fixed price quote properly in more detail another day. This is long enough already.
And if you want help getting your pricing structure sorted, book a 10-minute chat and let’s work through it.
Frequently Asked Questions
Can you use fixed price quoting even when the job scope isn’t fully clear upfront?
Yes, and this is actually one of the strongest reasons to use fixed price quoting. You quote on the known scope, then include clearly written variation clauses that cover what happens if unexpected work is found. That way the customer still has a firm price for what’s agreed, and there’s a documented process for anything extra that comes up. A common approach is to make an allowance – often called a provisional sum – basically an estimate of the cost to do the bits that are unclear that will get firmed up later.
What should a variation clause in a fixed price quote actually include?
A solid variation clause should describe what is not included in the quoted price, what circumstances would trigger additional charges (for example, discovering structural damage or asbestos), how those additional costs will be communicated and approved, and that no variation work will be started until the customer has signed off in writing. This protects both parties.
How do I price a fixed price quote accurately enough to protect my margin?
Start by tracking your actual job costs carefully over time so you know where your estimates tend to be accurate and where they blow out. Build in a buffer for complexity and risk. Make sure your hourly rate actually covers your overhead, not just your labour cost. And review your completed jobs against your quotes regularly so you can see where you’re losing money and adjust.
Does the type of trade or job size affect whether fixed price quoting is appropriate?
Not really. Fixed price quoting works for a one-hour electrical job and a six-month renovation. The scope, the variation clauses, and the level of detail in the quote will obviously differ, but the principle is the same. The size of the job actually makes it more important to have a fixed price and clear documentation, not less.
How do I explain the move from cost plus to fixed price quoting to existing customers who are used to time and materials billing?
Be straightforward about it. Tell them you’re moving to fixed price quoting because it gives them more certainty about what they’ll pay, and that you’ll include variation clauses so any unexpected work is handled clearly and fairly. Most customers prefer a fixed price once it’s explained properly. The ones who push back on it are usually the ones who’ve been benefiting from loose documentation in the past.