Explaining the contract price to your clients

What should I include in my contract price?

HIA fixed price contracts include a fixed price component, allowances for prime costs or provisional sums and GST. 

The “fixed price component” will often include a margin to cover the builders general business costs and overheads. 

Do I need to disclose my margin? 

No. Under a fixed price contract, you are not required to disclose your margin. 

It may however be included in the contract (in a schedule, for example) as it may be applied to variation and prime cost or provisional sum items during construction. 

How do I calculate the contract price? 

Calculating a contract price is complex and should take into account:

• project specific costs
• project fees and charges 
• general business costs 

What are project specific costs?

Project specific costs are generally items which are required for the physical construction of a property. These items can fluctuate over time and may change due to market pressures. 

When calculating the contract price for these items, you should consider and calculate:

• the actual cost of the item 
• GST calculated on the item 
• an amount for your margin 

Project specific costs may include: 

• cost of labour and services (e.g., your hourly rate on site)
• cost of building materials (e.g., cost of steel, timber frames or items selected by the client)
• cost of plant, equipment and services (e.g., scaffolding, cranes and excavators)
• cost to repair, replace or rebuild any damage or loss or defects 
• costs of all subcontracts.

These items may form part of the provisional sum or prime cost item schedules or may otherwise be incorporated into the contract price. 

What are the project fees and charges?

Builders will generally incur the following fees and charges while building a new home:

• council fees 
• building and development approval costs 
• fees for surveyors, structural engineers, architects
• any excess or premiums for insurance claims
• fees payable in connection with a legislative requirement

Depending on the contracting arrangements your business uses, these amounts may be dealt with in tenders or preliminary agreements. If you don’t use these contracting methods, you should include these amounts within the contract price in your building contract. 

Generally, builders do not apply their margin to project fees and charges but if included in the building contract, they may attract GST.

What are the general business costs?

The contract price should also account for expenses incurred as a result of running your business. 

The following are just some examples of costs which builders may face when carrying out building projects. 

• portable long service leave levy
• workers compensation
• payroll tax 
• finance costs
• premiums on insurance 

These costs are a legal requirement for most, if not all, building businesses. You may either build these costs into your overheads or cover them in your labour and service fees. 

How does GST work under a fixed price contract?

Not all items included in a fixed price may attract GST, however, often a builder will provide a fixed price and apply GST directly to that amount.  The Contract Price, which is made up of the fixed price component, prime cost allowances and provisional sum allowances (which may include margins) are inclusive of GST.

Can items that are GST-exempt be excluded from the contract price?

Some components of a build may be GST-exempt. However, if these items are required to be included in the contract, builders must charge GST as it becomes part of the goods and services that are being provided under the contract.

For example, the following items are common fees, charges, and levies which the builder is required to pay to Government departments. These items will generally attract GST, however it can change between jurisdictions so it is important for builders to confirm whether they are GST-free or not before including in the contract price. 

These items will generally attract GST if they form part of your building contract:

• government fees, charges, and levies 
• home warranty insurance
• council fees 
• any levies charged for the project, for example water or sewage 
• inspection fees 
• building application plan fees

It’s also important to note that some of these items are not required to be included in the contract price as they are paid by the client. 

Keeping your client informed

HIA understands that it can be difficult explaining some of these details to clients. To make things easier, we have prepared a short infosheet for consumers which builders can print and provide to clients.

The client handout offers a simple explanation of the contract price.

Client handout