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Guidelines when using cost plus contracts

HIA’s NSW cost-plus contract is for use when you are contracting with an owner to do residential building work and the contract price is not known.

Beware of providing estimates 

One of the most frequent causes of disputes in cost-plus contracts is when the costs of doing the work exceed the client’s initial expectations. Sometimes it is the builder’s initial ‘guesstimate’ on costs that set a client’s expectation. Although cost-plus contracts must contain a warning that the contract price is not known, a poorly calculated estimate may expose the builder to liability under trade practices legislation as it may be considered misleading and deceptive. 

Often your client will insist that you provide them with an estimate so they have an idea on how much the project will cost. If you do provide an estimate, ensure that: 

  • you define the work to be done carefully and the area where that work will be done, especially where renovations are involved 
    the purpose of the estimate is clear (i.e. for the purpose of the owner’s obtaining finance or the nominated amount for the Home Owner’s Warranty Insurance policy) 
  • you provide your client with regular updates in relation to the cost of the works calculated progressively so that they do not exceed budget 
  • you amend your estimate if the client requests changes to the works and advise the client of the new estimate 
  • the estimate is accurate and you have good explanation for its calculation 
  • your estimate is based on the latest known material and labour costs and that you have made allowance for cost increases. It is necessary during the course of each job to regularly check to ensure actual costs are in line with your estimates. 

Practical tip

Where the client has requested an estimate it may be better to provide a range of prices – e.g. the estimated cost of carrying out the work is between $250,000 and $285,000. Err on the side of caution and overestimate the final price when the price can not be accurately estimated. 

Scope of works and variations 

Although the contract price is not known, before you sign a cost-plus contract you must ensure that your contract contains a sufficient description of the work you are being contracted to do.
Plans and specifications may form part of the contract. If the scope of works is varied at any stage of the job you must get a signed variation. The variation must be in writing and signed by both the builder and the client before any of the variation work is commenced. You should also give your client a warning that the price will increase in accordance with the contract conditions. 

Practical tip

Always add a note on your variation or estimate form stating ‘Note, this is a change to the original agreed scope of works and the owner agrees to pay the increase in the price in accordance with the contract’. 

When do I get paid? 

Under the cost-plus contract you have the option of either creating your own progress stages or using the standard progress stages as set out in the contract. If you decide not to create your own progress stages then the standard progress stage is: 

(a) for the first progress stage – the Friday after the first full two-week period after commencement
(b) for all other progress stages – every second Friday after the previous progress claim. 

Practical tip

Ensure progress claims are made on time in accordance with the contract no matter how small the claimed amount and always give the customer a statement with copies of the invoices/receipts being claimed whether or not they have been requested.
If you are not paid, then stop the work immediately in accordance with the contract, no matter what the circumstances. Seek advice from an HIA Workplace Advisor when structuring default and suspension notices. 

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

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