A cost-plus contract price is not fixed, the builder only has to give the owner a reasonable estimate of the works, whereas a fixed price contract sets a specific dollar amount for the project.
There is much conjecture at the moment that builders are better protected against price increases if they enter into a cost-plus contract compared to a fixed price contract for domestic building works.
However, entering a cost-plus contract should be treated with caution.
Section 13 of the Domestic Building Contract Act 1995 (Vic) (DBC Act) provides for restrictions on cost-plus contracts, and in particular section 13(1) states that a builder must not enter into a cost-plus contract unless:
- The contract is of a class allowed by the regulations for the purpose of this section; or
- The work to be carried out under the contract involves the renovation, restoration or refurbishment of an existing building and it is not possible to calculate the cost of a substantial part of the work without carrying out some domestic building work.
Flowing from this, one must then turn to Regulation 10 of the Domestic Building Contracts Regulation 2017 (Vic) (the Regulations) which provides that the allowable class for a cost-plus contract is a contract entered into on or after 1 August 2017 where the works have been reasonably estimated in the amount of $1m or more (prior to 1 August 2017 the reasonably estimation was $500,000 or more).
If one then turns to the explanatory memorandum for when the DBC Act was being introduced into Parliament, one can see that the intention by Parliament for the introduction of this section was that the builder must not enter into a cost-plus contract unless the:
- Contract is of a class allowed by the Regulations; or the work involves the renovation of an existing building, and it is not possible to calculate the cost of the substantial part of the work without performing some of the work; and
- Contract contains a fair and reasonable estimate of the total contract price.
And upon establishing the above, if the builder does not comply with clause 13, then the builder will be unable to enforce the contract against the owner, however, Parliament did note that the Tribunal may award the builder the cost of carrying out the work plus a reasonable profit, if it considers that it is not unfair to the building owner to do so (which is reflected in section 13(b)).
The Explanatory Memorandum for the DBC Act expressly states that this provision (i.e., clause 13) effectively prohibits the use of cost-plus contracts for new homes. This would be true if the new home was a standard home which could be reasonably estimated by the builder, but there would be some instances for new homes which can not be calculated because of the unknown scope of work. However, again, caution should be exercised as the rules for entering in a cost-plus contract are governed closely by section 13 of the DBC Act and regulation 10 of the Regulations. It should also be noted here that the fact that the owner says its ok to enter a cost-plus contract, will not be sufficient to avoid a breach of the requirements in section 13 and regulation 10 and the Tribunal finding an unenforceable contract.
If you have an allowable contract and therefore you comply with clause 13 of the DBC Act, you should ensure you follow the below steps:
When entering into the contract:
- You base your contract estimate on the latest known material and labour costs and scope of works as detailed in the plans and specifications known at that time;
- You should keep a detailed record of how you have prepared your estimate so if you are questioned on the ‘reasonableness’ of the contract estimate you have evidence to support how you calculated the figure; and
- Ensure you identify what works you have not priced in any estimate (for example if you are doing a renovation, you should detail what areas of the existing building are not covered in your contract).
During the building works, you should:
- Regularly review your actual costs against your estimate and keep the owner informed if the actual price is different to your estimate;
- When submitting your progress claims, you should provide costs of invoices, receipts, and other supporting documentation to substantiate the actual amount you are claiming;
- Ensure any changes to the building works (which were known or not known at the time of the contract) are reflected by way of a valid variation;
- At the completion of the contract you should provide a reconciliation of actual costs and provide the same to the owner.
If you’d like to understand more about this topic, feel free to get in touch.