The Domestic Building Contracts Act 1995 (“DBCA“) has served the Victorian residential building industry for almost three decades. However, increasingly it is looking more like a relic of the early 2000s and 1990s and often does not truly reflect the modern conditions of domestic building in the State.

This article suggests that there is a need for urgent reform of the DBCA to assist builders and owners alike in domestic construction to more accurately reflect the contemporary nature of building work, the parties’ contractual relationship, and methods of building.

Changing Environment in Building Practices

It is a truism that more apartment buildings are being constructed than ever before, with an emphasis on higher density and multi-storey living.  On the other hand, the Domestic Building Contracts Act 1995 has always seemed more geared to the construction of a new home on a quarter acre block, with staged building payment milestones (Base, Frame, Lock Up, Fixing and Completion) that are all perfectly acceptable to the owners, builders, and project financiers alike.

The reality is that a building contract between a Builder and a high end developer concerning a new apartment block is not akin to a contract with the traditional “mum and dad owner”.  Furthermore, the customary payment stage schedule does not fit in snugly with extension and renovation projects in every instance.

Some post pandemic implications on the building industry have been higher interest rates, budgeting difficulties, time challenges, building material shortages, and labour issues. These factors, combined with the greater emphasis on renovation projects and multi-development living (eg: the high rise) has resulted in the DBCA becoming no longer as fit for purpose to accommodate all building project arrangements as when it was developed.

This article will deal with some problem areas that could be updated or reformed with the minimum need for new legislative change (in terms of new Acts of parliament). Instead, there could be amendments to the regulations, such as the Domestic Building Contracts Regulations 2017, to try resolve some of the more pressing conundrums.

Too often in the recent past the legislative emphasis seems to have been on making things more restrictive for builders in the name of consumer protection, but now it is becoming clearer that reform is needed to assist builders and consumers (owners) alike in the new construction paradigm.

Some of the fertile ground for reform of the DBCA is set out below, starting with a logical step of increasing the threshold contract value before a “major domestic building contract” is needed, and making this threshold value consistent with the price that triggers the need for domestic builder insurance (“DBI”).

Once a major domestic building contract is mandated, the raft of consumer protections must be welded into the contract, including the requirement of being a registered domestic builder, having a cooling off period, providing a consumer guide to the client, the rules about variations and delays/extensions of time, and the limits on progress payments.

Changes to the Requirement of a Contract

Since 2017, domestic building work over the threshold project value of $10,000 requires a major domestic building contract.  However, in practice there is a real question mark on whether a fully compliant building contract is relevant or appropriate for minor projects (eg: small renovations or extensions). Some consumers may often prefer the freedom of a less burdensome form of agreement for small projects or renovations.

There is also confusion caused by the fact this $10,000 threshold differs from the $16,000 figure that triggers the need for the builder to have mandatory domestic builder insurance, which protects an owner (primarily on the cost of defect rectification) if the builder dies, disappears or becomes insolvent.

It would be advantageous if:

• The threshold value after which a lengthier major domestic building contract is needed is matched with the other benchmark price after which compulsory builder insurance is required, in order to avoid confusion in the industry; or
• The threshold values are both raised to $20,000 by amending regulation 6 of the Domestic Building Contracts Regulations 2017 (to increase the $10,000 threshold price to become a major domestic building contract), and by issuing a Ministerial Order under s135 of the Building Act 1993 to mandate insurance for projects over $20,000 in value.

Cost Escalation Clauses

Secondly, in April 2022 a report was issued by “Better Regulation Victoria” about supply chain shortages and delays. The Victorian Government responded saying that “cost escalation clauses” could be appropriate if a notice was approved by the Director of Consumer Affairs to provide guidance and warning to consumers signing up to contracts.

In a domestic building contract, a “cost escalation” clause would be one that allows the builder and owner to agree in certain circumstances for an “across the board” increase to the contract price during the works in certain circumstances, akin to an agreed variation.  For instance, the parties may agree to a 6% increase to the total contract price if certain events arise after Lock Up is achieved, which would apply for the rest of the project.

This is different to a legitimate variation, which would refer to a “bricks and mortar” change to the nature, quality or quantity of specific items of work, rather than an agreed change to the total contract price that is not linked to a specific work item.

Currently, section 15 of the DBCA restricts the use of “cost escalation” clauses in any building contract.  For contracts with a price of over $500,000, any cost escalation clause will be void unless it is accompanied by a notice approved by the Director of Consumer Affairs explaining the effect of the contract clause.

At the moment, cost escalation clauses are unenforceable because no mandatory notice to consumers has been approved by the Director of Consumer Affairs.

Given the agreement by the Government in principle that a notice should be generated and approved to allow cost escalation clauses for projects over $500,000 in value, this should occur as urgently as possible.  This would then help resolve the cash flow and budgetary pressures suffered by builders and owners alike in this new paradigm of supply chain disruption and cost increases.

Changes to Cost Plus Contract Limitations

Thirdly, it is recommended that regulation 10 of the Domestic Building Contracts Regulations 2017 ought to be amended to allow for cost plus contracts to be entered into by builders if it is reasonably estimated that the project value will exceed $500,000.  This was the previous threshold price, but in 2017 it was doubled to $1 million.

It is submitted that the higher $1 million qualifying figure is unduly restrictive, and it would be better if builders and owners are allowed the “freedom of contract” to use the “cost plus” arrangement if it suits both parties to do so, at the lower threshold value.

There will still be restrictions on builders using cost plus contracts; for instance the need to provide the initial estimate and set out the builder’s fee in the contract document, to use all endeavours to provide a reasonably accurate estimate at that point, and to supply all supporting invoices and receipts to owners to substantiate payment claims.  In practice, owners using finance for projects may not be able to have their lender agree to this contract form.

It makes little sense to create a more restrictive paradigm for parties to use the cost-plus form of contract, if both parties prefer that option, and given the current cost and time pressures on builders in the construction industry.  This relates to the delays and shortages on materials and labour (eg from subcontractors) which is seeing lead times and budgets blowing out and/or becoming less predictable.

The ability of the parties to use a cost-plus contract, and the restrictions on the same, is otherwise as described in section 13 of the Act.

Changes to Progress Payment Stages

Finally, I refer to section 40 of the DBCA that prescribes progress payment stages and percentages, eg Base Stage, Frame, Lock-Up, Fixing Stage and Completion.  In fact, the stage descriptions and the percentages of the contract price associated have not really changed since the 1980s, when the DBCA’s predecessor Act was in force.

Reform is necessary because building methods have changed a lot since the 1980s and the stage descriptions are not appropriate benchmarks for multi-storey or apartment developments, renovation or extension projects and so forth. 

The parties in these contracts can opt to use a method 2 table where they agree to alternative stage descriptions and percentages, and regulation 13 of the Domestic Building Contracts Regulations 2017 prescribes two forms to be signed by the owner to show they understand and accept the alternative payment claim system.

In fact, I submit that the Form 1 notice that explains the grounds for alternative progress payment arrangements is out of date and requires amendment.  For instance, it currently states that alternative progress payments should only be used if the owner’s home is “unusual in some way” or it is an “exceptional” case.  Today, this is no longer accurate given that there are frequently circumstances arising where an alternative or ‘method 2’ payment table would be more relevant for the parties.  Often, these factors are no longer “exceptional” or “unusual” circumstances, so such loaded descriptors ought to be removed from the Form.

There should also be a further example added into Form 1 that refers to renovations, alterations and extensions that do not involve a total replacement of the home, as an example where the alternative progress payment table might be applicable for the parties to utilise.

Conclusion

A much-needed update to certain key areas in the DBCA, such as these, will help to ensure the Act stays relevant in its role of governing contractual relationships between domestic builders and owners, and will help avoid the current phenomenon of tokenistic compliance by developer owners.  It will also help builders and owners alike overcome some of the pressing challenges now facing many in the industry in their practical daily operations.

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The team at Lovegrove and Cotton is pleased to announce that three of our lawyers will be speaking: Adj Professor Kim Lovegrove, Justin Cotton and Tsigereda Lovegrove.

To register, please follow this link: IBQC Construction Dispute Resolution Conference Webpage

For further Lovegrove and Cotton policy articles on modernising the Victorian construction landscape, please refer below:

10 Point Plan to Fix Building Regulation in Victoria

Cost Plus Contracts in the State of Victoria – Some Insights

Variations and Cost Escalation Clauses in Victoria

This is a Lovegrove and Cotton publication, authored by Justin Cotton. 

Disclaimer

This article is for general information purposes and is not intended to be formal legal advice. For more advice on your rights and responsibilities in this area of law or other matters concerning building contracts and regulatory compliance, please do not hesitate to contact expert construction lawyers for more advice and assistance.