Fixed price vs cost plus contracts in UK construction 2026
What current labour inflation means for how you price, contract, and manage risk on residential projects.
Labour drives fixed-price risk more than materials right now. The longer the project, and the higher the labour share, the more fixed-price costs you in expected drift.
Source: ONS Labour Cost Index for construction, MHCLG Monthly Building Materials. Latest: N/A.
Fixed-price and cost-plus are not moral choices. They're risk allocation tools. A fixed-price contract says the contractor absorbs any cost movement during the build. A cost-plus contract says the client does. Choosing well between them is a question of which party can carry which risk at what price, and the answer moves with the market.
In 2026, with labour at N/A year-on-year and materials closer to equilibrium, the answer for a labour-heavy residential project is more nuanced than it was in 2020, when fixed-price was almost always correct, or in 2022, when cost-plus was almost always correct. This guide walks through the current risk environment, gives you a decision matrix, explains the JCT fluctuation clause options, and shows how to structure fixed-price quotes so the risk is sized properly.
The current risk environment
Labour has risen at N/A over the last year and the structural drivers (post-Brexit trade supply, ageing workforce, infrastructure demand) aren't reversing in the near term. Materials at N/A YoY are close to equilibrium; the 2022 materials shock is behind us. This makes labour the binding risk in any fixed-price discussion. A project that's 70% labour over 12 months carries a fundamentally different exposure than one that's 40% labour over 3 months, and pricing them identically is an accounting error.
Exposure calculator
Enter your contract value, expected project duration, and typical labour share for the work type. The calculator uses the current ONS labour YoY to estimate how much labour drift you'd expect over the project life under a fixed-price contract.
The drift figure is the contract value times labour share times labour YoY, prorated for project duration. It's an expectation, not a worst case. Build the contingency from the distribution, not the mean.
Decision matrix
Rough recommendation by project duration and typical labour share. Use it as a starting point, not a final answer; your margin buffer and client relationship both move the line.
| Duration | Labour 40% | Labour 50% | Labour 60% | Labour 70% |
|---|---|---|---|---|
| 3 months | Fixed OK | Fixed OK | Fixed OK | Fixed with contingency |
| 6 months | Fixed OK | Fixed with contingency | Fixed with contingency | Fixed with fluctuation |
| 9 months | Fixed with contingency | Fixed with contingency | Fixed with fluctuation | Fixed with fluctuation |
| 12 months | Fixed with contingency | Fixed with fluctuation | Fixed with fluctuation | Cost-plus |
| 18 months | Fixed with fluctuation | Fixed with fluctuation | Cost-plus | Cost-plus |
Typical labour shares by project type: groundworks 30 to 40%, new build super-structure 40 to 50%, rear extensions 50 to 60%, loft conversions 55 to 65%, heritage refurbishment 60 to 75%.
JCT fluctuation clauses, briefly
The JCT family of contracts offers three standard fluctuation options that determine how labour and materials cost movements are allocated between parties during the build. Worth knowing even if you don't use JCT directly; most bespoke residential building contracts borrow from the same structure.
Option A (no fluctuations, fixed price). The contractor carries all cost movements. Suitable when the project is short enough, or the margin large enough, that expected drift fits inside the buffer. Default position for small residential work historically. In a rising-labour environment, it's the most expensive option to price correctly because the contractor has to price the risk in.
Option B (contribution, tax and levy only). The client absorbs only statutory changes: VAT, employer NI, CITB levy, and similar. The contractor still carries underlying wage and material inflation. This is a narrow protection and not what most people mean when they say "fluctuation clause."
Option C (formula-based fluctuation). Cost movements are calculated against published indices and adjusted in valuations. This is the serious fluctuation mechanism. The client carries underlying wage and material inflation but bounded by a defined formula rather than the contractor's bare costs. For projects over nine months in a volatile cost environment, this is often the honest structure. It does require an agreed index (typically BCIS or a bespoke composite) and a working relationship that can handle the monthly adjustment.
How to structure a fixed-price quote in a rising-labour market
If fixed-price is the right call but labour drift is real, three things make the structure honest:
- Size the contingency from the data, not from habit. A 5% contingency covers central-case labour drift on a typical 9 to 12 month residential job at 50 to 60% labour share. If the project is longer or more labour-heavy, step up to 7 to 10%. If shorter or more materials-heavy, a narrower 3% is defensible. Explain the sizing in the quote so it doesn't read as padding.
- Write the quote-validity clause properly. "Valid for 30 days from issue; re-quote required if works do not commence within 90 days of acceptance." Short validity is not anti-client; it's honest in a rising-cost environment. If the client takes six months to confirm, the quote you wrote for today's wage rates isn't the right quote any more.
- Tier the payment schedule to materials procurement. A front-loaded schedule (larger milestone at slab/ground level, larger milestone at first fix) de-risks you against the biggest material purchases being priced on today's supplier quotes. It protects both parties against the middle of the project sitting unpaid while trade wages continue to tick up.
When cost-plus actually works
Cost-plus has a reputation as the contract type that lets builders over-spend. In the right context it's the honest one. Three cases where it's the better choice:
Small-practice residential where the client values transparency over certainty. Some clients would rather see the actual labour hours and materials invoices than pay a contingency they can't inspect. For trusted repeat relationships, cost-plus on an open-book basis is cheaper in expectation than fixed-price with the contingency priced in.
Listed-building repair and heritage refurbishment. The biggest costs in heritage work are the ones you find when you open up the fabric: rotten structural timber, hidden defects, salvage-and-match work. Fixed-pricing this accurately is close to impossible; either the contractor prices a huge contingency or carries ruinous risk. Cost-plus with an agreed rate schedule is the grown-up answer.
Heavily uncertain groundworks. Deep basements, tight-access retaining, made-ground sites. You don't know what's down there until you're down there. A fixed-price quote is fiction; cost-plus with a capped estimate and clear change-control is the structure that works.
For the live labour and materials figures this analysis is built on, the Cost Tracker is the free tool. For why labour and materials diverged in the first place, see the divergence guide .