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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.
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.
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.
To avoid disputes or potential consumer law claims, builders should follow these steps.
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).
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 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.
The cost of the building works includes those costs directly related to the work, including but not limited to:
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.
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.
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.
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:
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.
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
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