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$vuetify.icons.faPhone1300 650 620

Calculating interest under a HIA contract

Sometimes owners can be late to pay their progress claim by the due date. But did you know that HIA building contracts allow the builder to charge interest on these payments when they become due?

HIA Contracts in Victoria allow builders to charge interest on late payments at the percentage nominated by the parties in the contract from the date the payment becomes payable until the date payment is made.

How do you work it out?

Interest owing can be calculated using this simple formula:

Interest payable = Debt outstanding x interest rate x time overdue

To calculate and charge interest accurately, it is important that builders correctly administer their contract from the outset. This includes:

  • Nominating your preferred interest rate (Item 8, Schedule 1).
  • Nominating when progress payments are due (Item 7, Schedule 1).
  • Keeping records of when progress payment claims are issued to clients, when payment is due and when payment is received.

Example

Bob the builder has a Victorian New Homes Contract with Jenny the Owner.

Bob has set up his contract to include:

  • Item 7 – progress payments payable within 7 days; and
  • Item 8 – interest rate of 8% per annum

On 1 September 2021, Bob completed the Frame Stage and submitted a progress claim for $40,000.

On 8 September 2021, the progress claim is due to be paid by Jenny (7 days after Bob issued the progress claim).

On 18 September 2021, Jenny makes payment of the progress claim (10 days late).

Bob is entitled to charge interest calculated at 8% of $40,000 (debt outstanding) from 8 September (due date) to 18 September (date paid).

To work out the interest payable, it may help to break down the formula as follows.

  1. $40,000 (debt) x 8% (per annum) = $3,200
  2. $3,200 / 365 (or 366 if leap year) = $8.76 interest per day
  3. $8.77 x 10 days = $87.67 interest required to be paid by Jenny

What happens if you don't elect an interest rate?

The HIA Contracts allow the parties to select their own interest rate. However, there are some contracts such as the Victorian Small Works Contract, Kitchen Bathroom and Laundry and Medium Works Commercial Contracts which include a default interest rate which will apply if the parties do not nominate their own interest rate into the schedule.

In circumstances where there is no interest rate selected and no default, the builder may bring a legal action against the owner if they did not make payment by the due date.

To find out more, contact HIA's Workplace Services team

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