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Using a cost plus contract in Tasmania

This infosheet provides an overview of what cost plus contracts are, how they are used and how to avoid common issues. HIA has a Tasmania Cost Plus Contract for sale available for purchase through Contracts Online.

Whilst a cost plus contract is similar to a fixed price contract, there are some key differences which you need to be aware of.

This infosheet provides an overview of what cost plus contracts are, how they are used and how to avoid common issues. HIA has a Tasmania Cost Plus Contract for sale available for purchase through Contracts Online.

What is a cost plus contract?

A cost plus contract is a contract that is used when you can’t provide the client with a fixed price for the building work. Accordingly, there is no guarantee of what the final contract price will be.

Requirement to provide an estimate price

The Residential Building Work Contracts and Dispute Resolution Act 2016 requires a fair and reasonable estimate of the price be provided in the contract, along with the method of how the contract price is calculated.

The final price paid for the building works may differ to the estimate price. The final contract price will be equal to the total of the following:

  • The cost of the building works (Schedule 5); plus
  • The builder’s fee (Schedule 5); plus
  • Any GST payable.

How do you calculate the estimated price?

HIA Cost Plus Contracts require an estimate price of the building works be included in the contract schedule.

To avoid disputes or potential consumer law claims, builders should consider following these steps when using cost plus contracts and providing the estimate price.

  1. Provide estimates based on the latest known material and labour costs and allowing for future cost increases.
  2. Keep a record of the method used when calculating your estimates.
  3. Err on the side of caution and overestimate where you are unable to accurately estimate any prices.
  4. During the project, regularly review the actual costs incurred against the estimate provided and provide regular updates to your client.

Key contract provisions

Correct administration of your cost plus contract is critical. Accordingly, it is important to understand your contract terms, including the following.

The building works (particulars of contract)

A common misconception is that a cost plus contract operates on the same basis as a “do and charge” agreement. A cost plus contract cannot be used in a way where the owner instructs what work should be done as the work is being completed.

Accordingly, builders should include a clear scope of works and include a brief description of the building works in the Particulars of the Contract. Builders are also required to provide full plans and specifications detailing the building works to be carried out.

The estimated contract price (item 2, schedule 1)

The estimated contract price is inclusive of GST and is required to be included in the contract before works are commenced. There are several reasons why the estimate may change, including but not limited to:

  • Variations.
  • Increases to taxes, duties, or fees.
  • Interest on overdue payments.
  • The actual cost of Prime Cost or Provisional Sum items exceeding the estimates in the Contract.

A full list of reasons and clauses which may impact the final contract price is included at Item 2, Schedule 1.

The builder’s margin (item 13, schedule 1)

The builder’s margin is a percentage that can be charged on variations, prime cost and provisional sums and covers the builder’s business costs and profits. It can also be charged when the contract is terminated under certain circumstances.

This is different from the builder’s fee which is separate to any amount you claim for work that you are doing onsite. Your hours worked onsite is considered a cost of the building work and is not counted as part of the builder’s fee or your margin.

Progress payments (schedule 2 and clauses 28 and 29)

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

The HIA Cost Plus contract provides the choice of either progress payments as a periodic claim (fortnightly, monthly etc.) or a described stage claim for the value of the work completed to that stage.

It is important to note that you can only claim for works that have been completed. The progress claim must set out details of the cost of the building works completed for that stage, the builder’s fee claimed for that stage and any other moneys payable to the builder pursuant to the contract.

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 using a HIA contract, the progress claim must be paid by the owner within 5 working days after the works has been substantially completed and the builder has provided the progress payment claim. If you are not paid, you may stop the work immediately in accordance with the contract and you may issue default notices.

Cost of the works (schedule 5)

The cost of the building works means the actual costs attributable to or in connection with the building works and can include, but is not limited to, the following:

  • Cost of materials and labour.
  • Fees to surveyors, engineers, and architects.
  • Premiums on any insurances.
  • Cost of all subcontracts connected with the building work.

The builder’s fee (schedule 5)

This is an amount that the builder can charge that is separate to the cost of the building works to cover the builder’s overheads and profits.

The builder’s fee can be either a set amount or a percentage of the cost of the building works. If you elect to claim a percentage (e.g. 20%), then you would claim this 20% with each progress payment. If you elect to claim your builder’s fee as a set fee, this amount will be distributed equally across each of your progress payments.

To find out more, contact HIA's Workplace Services team on 1300 650 620.

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