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Guidelines when using ACT Cost Plus contracts

An understanding of cost plus contracts is important when completing works where it may not be possible to provide a fixed quote until you commence the works.

Whilst a cost plus contract is similar to a fixed price contract, there are some differences, particularly concerning pricing and progress claims that you need to be aware of. 

A Cost Plus contract is used when a fixed price for the works cannot be given at the time of entering into the contract. For example, if you are completing a renovation, it may not be possible to provide a fixed quote until you commence the works due to the cost of materials and labour or any additional works that may be required.

Do I need to provide an estimate Contract Price?
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No, the contract does not require the builder to provide an estimate.
What if the owner insists on an estimated Contract Price?
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An owner may insist that the builder provide an estimate so that they have an idea of how much the project will cost.

If you do choose to provide an estimate, the HIA Cost Plus contract contains a warning to the homeowner that the contract price is not known and any estimate provided is an estimate only and not a representation of the contract price. 

If you do provide an estimate, you should ensure that the estimate is accurate and you should keep records of your calculations. You must clearly and carefully define the work to be completed and your estimates must be based on the latest known material and labour costs (with allowances for cost increases). 

You can also provide the homeowner with a price range, for example, the estimated cost of carrying out the work is between $250,000 and $285,000. 

 
What happens if the estimate exceeds the final price of the works?
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Disputes may arise due to the cost of the works exceeding the owner’s initial cost expectation, which may be based on an estimate provided by the builder.

A poorly calculated or miscommunicated estimate may expose the builder to liability under Australian Consumer laws as it may be considered misleading and deceptive. 

 
What do I need to do when giving an estimate?
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To avoid disputes or potential consumer law claims, builders should follow these steps. 

  1. Any estimate provided should:
    • a. be based on the latest known material and labour costs;

      b. include allowance for cost increases; and

      c. state the purpose of the estimate (for example, the client requires an estimate to obtain finance).

  2. You should maintain a record of your cost calculations. 
  3. Accurately define the scope of works and the area where the work is to be completed, especially if renovations are to be undertaken. 
  4. During the project, you should:
  5. Regularly review actual costs as against your estimates; 
  6. Provide regular updates to your client regarding costs of the works; 
  7. If the client requests a change to the works before work has commenced, you must amend your estimate and advise the client of the new estimate. Any changes that occur after commencement will follow the variation process under the contract.
  8. Err on the side of caution and overestimate if you are unable to accurately estimate any price.
  9. Provide the homeowner with a price range, for example the estimated cost of carrying out the work is between $250,000 and $285,000.
 

Key contract provisions

Scope of work (Schedule 5)

A Cost Plus contract is not a “do and charge” contract.

The only element that is not fixed or agreed at the time of signing is the price. This means that you must have a clear scope of works and plans and specifications that sets out in detail the building works to be carried out.  If changes are made along the way, the parties must follow the variation process under the contract.

The price of the building works (Clause 10 and Schedule 2)

The contract sets out that the price of the building works is an amount equal to:

    (a) the cost of the building works; plus

    (b) the builder’s fee; plus

    (c) any GST payable in connection with the above amounts.

What does the ‘cost of the building works’ include?

The cost of the building works includes those costs directly related to the work, including but not limited to:

  • the cost of all subcontracts
  • the labour costs of the builder and its employees
  • fees for services such as surveyors, engineers, architects and consultants
  • premiums for insurances referred to in the contract
  • the costs associated with any equipment, plant and materials; and
  • any other costs as outlined in Schedule 2 of the contract.

The cost of the building works excludes any GST paid by the builder in respect of a taxable supply in which input tax credits are available to the builder. This is because you do not want to charge GST on a GST-inclusive amount. GST will be recoverable by the builder in accordance with clause 10 of the contract.

What is the builder’s fee?

The builder’s fee is money that the builder charges the owner on top of the cost of the building works to cover indirect costs, overheads and profit.

The contract provides the option to either make the builder’s fee a set amount for the whole job or alternatively, it can be charged as a percentage of the cost of the building works. If you do not specify a percentage, the default percentage amount is 20%.

The builders own time on the job is a direct cost and should be charged as a cost of the works, not as part of the builder’s fee.

Progress claims and payments (Schedule 2 and Clause 10)

As there is no fixed price when using a cost plus contract, it can be difficult to use progress payments stages linked to the milestone of completed works. 

The HIA Cost Plus contract provides the option of either creating your own progress stages or a time period for reaching progress stages set out in Schedule 3, being: 

    (a) For the first progress stage – the Friday after the first full 2-week period after commencement of the works; and

    (b) For all other stages – every second Friday after the previous stage.

Progress claims needs to be accompanied by evidence of the costs incurred up to the time of making a claim (such as invoices, receipts from suppliers and contractors and any other documents that justify the cost being claimed).

Regardless of the size of a progress claim, you should ensure that progress claims are made on time and in accordance with the contract.  If you are not paid, you may stop the work immediately in accordance with the contract and you may  issue default notices.

See Attachment A for an example of how to calculate the price of the building works under a cost plus contract.

Variations (Clause 16)

A variation under a cost plus contract has the same requirements as any other contract.  For example, it must be in writing and signed by both the builder and the owner before any of the variation work commences.  Either the builder or the owner may ask for a variation. If the owner requests a variation, the builder must reply in writing within 5 days of the request (or as soon as reasonably practicable). The builder has the right to refuse a variation.

There are some circumstances where the builder does not have to seek a variation prior to carrying out the work, for example, works required to be carried out urgently or works that are considered to be an ‘automatic variation’.

For each variation, the owner must pay to the builder an amount equal to the sum of:

  1. the cost of the building works; plus
  2. the builder’s fee; plus
  3. any GST payable in connection with the above amounts.

The price of the variation is due and payable at the next progress payment after the work is carried unless a different time is agreed.

Attachment A
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Example of how to calculate the price of the building works

Bob is a builder who has used the HIA ACT Cost Plus contract.

For a particular stage, Bob calculates the price of the building works as follows.

Bob receives invoices for the following costs at this stage:

Subcontractor (carpenter) $5,500 incl. GST
Timber supplies $2,200 incl. GST
Surveyor's fees $1,100 incl. GST
Scaffold hire $1,100 incl. GST
TOTAL $9,900 incl. GST

NOTE: Bob is able to claim input tax credits for GST paid on these amounts so excludes the GST from the cost of the building works.

A. Total of the above amounts excluding GST = $9,000

Bob has also worked on the project himself for 10 hours at $100 per hour (excluding GST).

B. Total labour cost excluding GST = $1,000

Bob has nominated a percentage of 20% for his builder’s fee. Bob applies 20% to the total of amounts both A and B.

$9,000 + $1,000 = $10,000

$10,000 x 20% = $2,000

C. Total builder’s fee = $2,000

Bob must now  calculate GST for the total of the amounts calculated for A, B and C.

($9,000 + $1,000 + $2,000) x 10% = $1,200

D. Total GST = $1,200

When Bob adds A, B, C and D together ($9,000 + $1,000 + $2,000 + $1,200), he will get the price of the building works for that stage: $13,200

To find out more, contact HIA InfoCentre

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