Guildelines for Cost-Plus Contract in NSW

As the result of the continuing credit crunch, many homeowners have lost substantial capital and income.  This shortage of funds and credit has led to an increase in defaults in progressive payments by homeowner mainly in relation to a Cost Plus contract.  The usual custom and practice of invoicing the homeowner for the labour and materials as selected by them has led to the builder not being paid.

Enterprising consumer’s solicitors are using the notifications requirements under section 7 of the Home Building Act 1989 and situations where a builder may have given an original estimate for warranty insurance purposes as reasons for not to pay progress claims.

In the above cases, where the price is increased for whatever reason beyond the original estimate then the consumer has grounds against the builder for potential deceptive and misleading conduct under trade practices because they were not given an amended estimate.

Guidelines when using Cost-Plus contracts in NSW:

1.       If you give the customer a written estimate for warranty insurance purposes or original quoting purposes either before or at the time of entering into a Cost Plus contract, then define the work to be done carefully and the area where that work will be done, especially where renovations are involved.

2.       If the client changes the specification (scope of works) either before or after the work starts then by variation give a revised estimate.  Always over estimate when you do not know the final price.

3.       Always add these words to your variations or estimates “Note, this is a change to the original agreed scope of works and the owner agrees to pay the increase the price in accordance with the contract”

4.       Even where no estimates have been given, if the client changes the scope of works then you must provide the customer with a written variation that details the change to the scope of work.   You should also give a warning that the price will increase in accordance with the Cost Plus contract.

5.       Variations to the scope of work, whether the price is likely to increase or not you must be give the customer a variation notice within 5 days of the event occurring.

6.       Defective plans and engineering will require a notice to the customer detailing and setting out the problem and requiring the customer to rectify or give instructions within 2 days.

7.       Where the customer requires you to rectify plans and engineering using your experts, then by notice, you must advise the owner of intended actions, give warning that the price will increase, require their approval before you proceed.

8.       Never go beyond 14 days progress claim no matter how small the claimed amount and always give the customer a statement with copies of the invoices being claimed whether they want them or not.

9.       If you are not paid, then stop the work immediately in accordance with the contract, no matter what the circumstances.  Seek advice from HIA IRLS when structuring default and suspension notices. 

10.   Finally, remember that a Cost Plus contracts takes as much administration effort as do standard home building contracts and involve many of the same processes.

If this article raises questions on how you administer your Cost Plus contract then contact HIA IR & Legal on 1300 650 620 for more Info sheets and the correct advice when using HIA contracts.

Col Buttenshaw
Executive Director Northern Rivers & Gold Coast.