Key changes to domestic building contracts explained

This resource will help you understand the recent changes and how they may impact your business.

What are the changes?

The Amendment Act makes the following changes to the DBCA:

• how builders and developers contract to build multiple homes, particularly in relation to how consumer protection mechanisms apply;
• the exclusion of certain preliminary services from the definition of ‘building work’ under the Act;
• an amended approach to cost escalation clauses, which will be permitted subject to a number of restrictions;
• an amendment to existing rights to variations and contract termination; and
• a revised approach to progress payment clauses and deposit limits.

Builders, developers and multi-unit projects

The amendments define who qualifies as a ‘developer’ and limits the application of consumer protection measures in contracts between developers and builders. The intent is to safeguard the interests of the consumer while restricting the developer’s ability to rely on those protections.

Who is a developer?

A ‘developer’ is defined as a person who either:

• enters into one or more contracts for or arranges for domestic building work to be carried out for two or more homes on one or more sites, that are each contracted for or intended for sale; or
• owns the land on which domestic building work is carried out for two or more homes on one or more sites, that are each contracted for or intended for sale.

How will contracts with developers be affected?

The DBCA will apply to a domestic building contract between a builder and a developer in the following manner:

• implied warranties by the builder remain, continue to run with the building, and cannot be signed away;
• the builder under the contract must be registered;
• the builder must obtain and supply foundations data to the owner; and
• the contract must: 
• include plans and specifications that are sufficiently detailed to obtain a building permit; state the registration number of the contracting registered building practitioner (BP);
• if the BP is contracting on behalf of a partnership, the names and addresses, and registration details (where applicable) of every other member of the partnership;
• state the contract price or, in the case of a cost-plus contract, how the amount the builder is to be paid is to be determined; and
• state that contracting out of the requirements under the DBCA will be prohibited.

The other requirements for domestic building contracts under the DBCA will not apply to contracts between builders and developers.

Preliminary services

To align Victoria with other Australian jurisdictions the preparation of plans, specifications and bills of quantities is not considered ‘building work’ under the Amendment Act. This means these services may be provided under preliminary services agreements, which do not need to comply with the domestic building contract requirements, and will not trigger domestic building insurance.

Cost escalation clauses

Although the DBCA presently allows cost escalation (or ‘rise and fall’) clauses in contracts valued over $500,000, they have never been approved for use by the Director of Consumer Affairs Victoria.

The amendments will now allow cost escalation clauses to be used without specific approval, but only where:

• the contract price is $1 million or more;
• the builder has provided the owner with a written notice in the required form that explains the effect of the cost escalation clause; and
• the owner signs or initials the clause.

A cost escalation clause cannot be used to increase the contract price due to a delay where the cause of the delay was within the builder’s control. Further, cost escalation in aggregate will be capped at 5% of the total contract price.

When utilising a cost escalation clause, the builder must warrant they have calculated any price increases with due skill and care, taking into account all information available at the time. The builder must also provide the owner with evidence of the increase, such as invoices or receipts, within a reasonable time.

Limits on deposits

The DBCA currently limits the amount a builder can demand as a deposit regardless of the type of project. The limit is 10% for contracts less than $20,000 and 5% for all others. This can create a problem for builders where there are significant upfront costs, such as building techniques that involve off-site construction or difficult sites that require more preparatory work.

Under the Amendment Act, the deposit requirements will be removed from the DBCA and instead the Regulations will set out the maximum amount of deposit, depending on the type of contract involved. However, at the time of writing, the Regulations have not been released. We are still awaiting further details on any prospective changes to the current settings.

Limits on progress payments

The DBCA currently limits progress payments by restricting the amount a builder can charge for completion of specified stages of the build process. Method 1 of Schedule 3 of HIA’s domestic building contracts reflects the DBCA requirements and sets out the progress payment limits for different stages. Alternatively, in limited circumstances builders may utilise the Method 2 approach to determine project-specific progress stages and amounts.

Under the amendments the DBCA will define three types of major domestic building contracts. These may have different prescribed stages and payment amounts under the Regulations. The contract types relate to the amount of work attributable to ‘modern methods of construction’ (MMC). We anticipate MMC will cover a range of off-site prefabrication and modular building methods, however specific details will also be included in the Regulations.

The three new categories for major domestic building contracts are:

• Less than 30% of the builders expected costs related to MMC;
• From 30% to 50% of the builders expected costs related to MMC; and
• More than 50% of the builders expected costs related to MMC.

Additionally, a builder will be prohibited from seeking progress payments from the homeowner that are more than the lower of:

• the prescribed percentage for the relevant stage (to be confirmed in future); or
• an amount directly related to the progress of the work.

What does this mean for traditional builds?

Most detached homes are built using predominantly traditional, on-site construction methods, with materials brought to the site and assembled from foundations to the roof. They are likely to fall into the first contract category of less than 30% MMC.

Rights where contract not signed

If a major domestic building contract is not signed by both parties, the builder will have no contractual rights or entitlements under the contract. By contrast, the building owner will be empowered to enforce their rights in relation to an unsigned contract.

A builder may still apply to VCAT to recover the cost of work performed and a reasonable profit, but only if VCAT is satisfied that exceptional circumstances exist, or that the builder would suffer significant or exceptional hardship, and recovery would not be unfair to the owner. 

These changes reinforce the importance of ensuring you have a signed building contract in place prior to commencing any work.

Contract variations process

Currently there are two variation processes, one for owner-initiated variations and another for builder-initiated variations. These will be amalgamated into a single process to improve consistency and procedural efficiency.

However, all variations must still:

• be agreed to in writing and signed by both parties; and
• detail the variation’s nature, reason, cost, need for amended permit(s) and any delay (including a reasonable estimate of the length of the delay).

Exceptions will allow the builder to vary the contract without prior consent, but only when required by an uncontested building order or urgent health and safety concerns, and prompt notice must be provided to the owner.

As is currently the case, if a variation is not compliant, builders will not be able to recover variation costs unless VCAT determines the building will experience exceptional hardship and the decision will not be unfair to the owner.

Ending the contract due to delays or price increases

A building owner is currently allowed to terminate a major domestic building contract where:

• the completion time extends by 50% or more; or
• the contract price increases by 15% or more, excluding prime cost items, provisional sums, or owner-initiated variations.

However, the amendments remove the requirement that the increase be due to circumstances the builder could not reasonably have foreseen at the contract date. While this change simplifies the process by removing the requirement to assess the builder’s ability to foresee the delay or price increase, it also broadens the owner’s ability to terminate.

Do you need to update your contracts now?

No. With an expected start date of 1 December 2026, there is currently no requirement to update your contracts.

Prior to the start date, HIA will review and update our contracts and inform members that updated contracts are available.

Should the commencement date be amended, HIA will provide updates to members accordingly.

To find out more, contact HIA's Contracts and Compliance team

Email us