Cost Plus Contracts

The Domestic Building Contracts Act (Act) sets out requirements and rules for contracts between building contractors and owners (including owner builders) for domestic building work with a value greater than $5,000. This information sheet provides an overview as to the requirements for cost plus contracts.

What is a Cost Plus Contract?
A cost plus contract is defined as a domestic building contract under which the amount to be paid to the builder cannot be determined at the time the contract is signed, even if prime cost items and provisional sums are ignored.

When can you use a cost plus contract?
The contract can be used where it is allowed by Regulation including contracts for work that are reasonably estimated will cost $500,000 or more and contracts for public construction where the Crown or a public statutory authority is a party to the contract.

Also you can use a cost plus contract where the work to be carried out involves the renovation, restoration or refurbishment of an existing building and it is not possible to calculate the cost of a substantial part of the work without carrying out some of it.

There is no guidance as to what “a substantial part of the work” means. If you are doing a renovation, restoration or refurbishment then it will depend on the circumstances of each case. You will need to justify the use of a cost plus contract if challenged.

Example:

Where you are performing only part of the work in a project (eg. Supervision), you cannot use a cost plus contract if the payment to you is less than $500,000 even though the cost of the total project is more than that amount.

You must give a reasonable estimate of the Price
If you use a cost plus contract you must give a fair and reasonable estimate of the total amount of money you are likely to receive under the contract at the time the contact is signed. You should be careful that the estimate is not a representation of the final contract price. HIA’s contracts contain a specific clause to emphasise this point.

What happens if you do not comply with the Act?
If you do not comply with the Act you cannot enforce the contract against the owner unless you apply to the Tribunal (VCAT) for an order that you be paid. VCAT may only make an order that you be paid the cost of carrying out the work plus a reasonable profit if it considers that it would not be unfair to the owner to do so. You also commit an offence. An application to VCAT will involve delay and expense and require you to justify the costs being claimed. The better option is to establish at the outset whether a cost plus contract may be used and to follow the rules that apply to the contract.

HIA has a Cost Plus Contract to assist you to comply with the Act (VCPC October 2003 edition). Our contract contains other clauses that, under the Act, must be included in cost plus contracts eg. a provision for progress payments at the completion of stages.

For more information call the HIA member line on 1300 650 620

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