Dispelling cost plus contract misconceptions (TAS)

Provided they are administered correctly, cost plus contracts can be a useful alternative to a fixed price contract, especially where the price of the work can not be adequately determined prior to commencement or where the cost of materials being used (such as steel) are particularly volatile.

However there are some pitfalls and misconceptions about how to properly use cost plus contracts. Often these misconceptions lead to disputes which may have been avoided had the contract been administered correctly. For this reason it is important to be aware of the actual legal and contractual requirements of using a cost plus contract. Some of the more common misconceptions and the actual requirements that apply include:

• Misconception: Residential building work can be carried out on a ‘do and charge basis’ using a cost plus contract and the client can decide what work they want done along the way.
  Actual requirement: As with any other residential building contract, all work to be done under the contract should be agreed upfront and set out in the contract with any relevant plans and specifications for the work attached to the contract. This will help to avoid later disputes or arguments over what was precisely agreed to be built. The Consumer Guide to building should still be given to the owner.
• Misconception: I do not need to do variations under a cost plus contract because the client can just add work along the way.
  Actual Requirement: As with any other building contract variations for cost plus contracts should be in writing and signed by both parties. Any changes to the scope of works or plans must be documented and approved by both owner and builder. This is good contract administration practice; A failure to provide a written variation may prevent you from recovering the cost of the variation work.
• Misconception: I can only recover my own time as a builder under the “builder’s fee”.
  Actual Situation: Two components make up the price of cost plus contracts. The direct costs of the works, such as labour, subcontracts cost and the cost of materials, and the “builder’s fee” (which can be a percentage of costs or a fixed fee) which is the builder’s margin and is designed to cover indirect costs, overheads and provide for a profit. You are entitled to charge and recover your time spent supervising and working on the job as another labour cost.  However make sure you keep accurate records of the time you spend on the job.

For more information on using HIA contracts please contact a Workplace Adviser on 1300 650 620.

_{DISCLAIMER – the above is intended to provide general information in summary form. The contents do not constitute specific advice and should not be relied upon as such. Formal specific advice should be sought by members with respect to particular matters before taking action.}