Domestic building works: is it a 'fixed price' or a 'cost plus' contract?

Introduction

When an owner first engages a builder to conduct domestic building works, the contract signed by the parties is usually either a 'fixed price' or a 'cost plus' contract. The difference between these two types of contracts is significant.

'Fixed price' contract

These are the most common type of domestic building contracts and provide for an agreed set or “fixed” price for the cost of the build. This means that the builder’s materials and labour costs, as well as the profit, are included in the price.

These contracts provide an owner with certainty as to the cost of their project and provides an incentive for the builder to finish the works in a timely way and within an agreed budget. However, this sometimes means that a builder may "overprice" a 'fixed price' contract to account for potential increases to the cost of materials and labour during the construction period.

Varying a 'fixed price' contract

Although the price of the build is supposed to be “fixed” at the time the parties enter into the contract, this is not always the case. Sometimes, either party may request a variation to the contract price. For example, if there is a shortage of a specified material, a more expensive, readily available material may need to be used as a substitute. If this is the case, both parties will need to follow the process outlined in the contract to accurately document the variation.

Additional costs

There are also other costs that can be charged on top of the “fixed” price, such as surveyor reports and prime costs, which are costs that are not yet known. It is important to have a good read of your contract to be aware of any additional costs that are not factored into the fixed cost and that may arise throughout the build.

'Cost plus' contract

A 'cost plus' contract is used in situations where the cost of the works cannot be determined. In this case, a builder is paid for all its allowed expenses to complete the job, plus an additional margin to allow for profit, without being required to make sure all of these costs are included in a fixed price.

However, prior to entering into a cost plus contract, the builder must provide a fair and reasonable estimate of the total amount they are likely to receive under the contract. There may be serious consequences for a builder who provides a poorly calculated estimate.

When can a 'cost plus' contract be used?

There are only three situations where builders can enter into 'cost-plus' contract for domestic building works. These are as follows:

1. contracts entered into before 1 August 2017 that are reasonably estimated will cost more than $500,000;
2. contracts entered into after 1 August 2017 that are reasonably estimated will cost more than $1,000,000; and
3. domestic building contracts for public construction where the Crown or a public entity is a party to the contract.

Cost plus contracts are usually a more transparent process than fixed price contracts because owners are entitled to receive all supporting evidence detailing expenditure and direct costs charged by the builder with each progress payment claim.

Further, given that the builder is entitled to charge for its works without being fixed into a pre-determined price, builders are less likely to over-charge owners for unknown variables during the build and more likely to spend money making sure the job is done well and with quality materials.

However, the total cost of the works can be uncertain for an owner, as the more costs associated with a build, the more “plus” that a builder may be able to charge. Accordingly, with definite cap on the contract price, builders may not have an incentive to keep costs low.

How Sharrock Pitman Legal can help?

With disruption to supply chains and ongoing uncertainty around access to materials and labour, managing the financial aspects of a build and meeting contractual obligations can be a rocky road for both builders and owners.

Understanding your contract and any implications for you should the build go awry, is paramount.

Whether you are a builder or an owner, we are here to help. If you would like further information about your domestic building contract, please contact our Property Law team by email property@sharrockpitman.com.au or call 1300 205 506.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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