Cost Plus Contracts in the State of Victoria-Some Insights
A cost-plus contract is a type of construction contract that involves the reimbursement of all project costs to the builder with a stipulated margin to cover overheads and profit. Typically, the builder will obtain the required materials and services to complete the works under the contract and will pass these costs onto the owners with the agreed margin to cover overheads, administration and profits.
The Builder Needs to Provide a Reasonable Estimate
When the Builder provides said estimate, the builder should ensure that it is as accurate as possible in the circumstances known to the Builder at the time. A record should be kept by any diligent builder pertaining to how the estimate was calculated and reached.
Section 13 of the Domestic Building Contracts Act 1995 (Vic)
(1) A builder must not enter into a cost-plus contract unless—
- the contract is of a class allowed by the regulations for the purposes
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.
(2) A builder must not enter into a cost-plus contract that does not contain a
fair and reasonable estimate by the builder of the total amount of money the builder is likely to receive under the contract.
(3) If a builder fails to comply with this section—
- the builder cannot enforce the contract against the building owner; but
- VCAT may award the builder the cost of carrying out the work plus a
reasonable profit if VCAT considers that it would not be unfair to the building owner to do so.
Some standard HIA contracts contain warnings to homeowners that the contract price is not known and any estimate provided is an estimate only and not a representation of the contract price.[1]
The HIA provides useful steps for what any estimate should provide. Any estimate that is provided by a builder should:[2]
- Be based on the latest known material and labour costs.
- The builder should maintain a record of your cost calculations.
- Accurately define the scope of works and the area where the work is to be completed, especially if renovations are to be undertaken.
- During the project, the builder should:
- regularly review actual costs as against your estimates;
- provide regular updates to your client regarding costs of the works;
- If the client requests a change to the works before work has commenced, you must amend your estimate and advise the client of the new estimate. Any changes that occur after commencement will follow the variation process under the contract.
- Err on the side of caution and overestimate if you are unable to accurately estimate any price.
- Provide the homeowner with a price range, for example the estimated cost of carrying out the work is between $250,000 and $285,000.
It is difficult to ascertain what constitutes a fair estimate of the costs of construction. In the VCAT case of Charterarm Investments Pty Ltd v Roberts (Domestic Building)[3], the Member provided that the following factors may need to be considered:
- Was the costing methodology adopted by the builder reasonable at the relevant time?
(b) Was all of the contract documentation finalised?
(c) Was the design documentation finalised?
(d) Were there are any other extenuating factors which may have influenced the builder’s reasonable thought process?
(e) Were any of the prices for quantities of work provided by the owner?
(f) Did the builder rely on prices obtained from sub-trades?
In the abovementioned case, the Member went on to make the point that “the contract is not for a fixed sum. It is a cost-plus contract” and that the stipulated amount was an estimate only rather than a fixed lump sum. The claim that the Builder had been misleading in that instance failed, although his method of calculation of the estimate was found to be in line with the expert evidence produced in the Hearing.[4]
Conclusion
Cost plus contracts do not provide any cost certainty to Owners as they are not fixed price contracts. Conversely, cost plus contracts provide more cost-flexibility for residential builders.
This is a Lovegrove and Cotton publication, authored by Ahmad Ali.
Disclaimer
This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact a construction law firm. The experienced team at Lovegrove & Cotton can help property owners and building practitioners resolve any type of building dispute
[1] HIA, ‘Guidelines when using cost-plus contracts’, (Article, 21 June 2022)
[2] Ibid.
[3] Charterarm Investments Pty Ltd v Roberts (Domestic Building) [2013] VCAT 205.
[4] Ibid at para 174.