Facts you should be aware of before entering into this agreement
(within jurisdiction of Victoria)
Usually, people may opt for a cost plus contract if the sum owed to the builder, as per the terms of the contract, is undeterminable when the agreement is made. This type of contract enables new home owners to have flexibility when building a new property, with promissory overall payment to the builder. Often, it has hard to assume a certain sum owed to the builder, even if prime costs and provisional sums are ignored. This is because, you, the home owner, wants the perfect property, and cannot at once decide all materials that will be used in the house.
However, these contracts can be very dangerous. In a perfect world, a cost plus contract seems ideal with the amount of flexibility, and leeway to elect and dispose of different materials for the house. In reality, there is a great amount of uncertainty associated with the cost plus contract, because of uncertainty of works to be carried out, materials etc… Disputes almost always arise, as there are no fixed terms in the contract and both parties are only concerned with their own best interests. It is advised that both owners and builders avoid entering into these contracts where possible.
As previously mentioned, at the time of formation, there are no fixed costs stated within the contract, which is why ambiguity and certainty can be serious issues. Usually, it is the owner paying for the materials which will constitute the house, plus, the cost of the actual labour being carried out by the builder. On top of this, the owner is also required to pay an additional fee to the builder, as per the terms of the contract. It may be 10% or more. This is so that the exchange of goods and services is profitable for the builder.
It is highly recommended that legal advice be sought before entering into any contract, but in particular a cost-plus contract, due to its uncertain and ambiguous nature.
It is worth while taking note of the below points before entering into a cost plus contract, to ensure your own security and avoid disputes;
- Legality; are you legally able to enter into this type of contract?
Before making the decision to enter into this contract, you must ensure that you have the legal right to, or otherwise, the contract may become void for purposes of illegality. In accordance with the Domestic Building Contracts Act 1995 (VIC) restrictions apply where an owner and a builder may only enter into a Cost-plus Domestic Building Contract under certain circumstances. Non compliance with the act will not only void your contract but potentially void your Home Warranty Insurance or be penalised in other ways.
- Reasonable Estimates:
You cannot go into the contract blind, you must make estimates which are considered reasonable as to how much you may think certain jobs and materials will cost. Reasonable estimates must be provided prior to entering the contract, otherwise there is even more scope for dispute. In fact, a builder MUST provide reasonable estimates of the domestic building works, and the estimate must be $500,000 or more, without this, he/she is not permitted to enter into a Cost-plus domestic building contract with an owner.
- You must be certain that a greater proportion of the building works cannot be reasonably quoted.
If it is impossible or extremely difficult for the builder to obtain quotes for a substantial part of the work to be completed, this is when there is a likelihood of a cost plus agreement being entered into. This applies to domestic building works such as renovation, restoration, refurbishment etc.. These jobs, in direct contrast to building a new home, can pose difficulty if there are things the builder is not aware of when entering the contract, and discovers later on in the process.
- Organisation and records:
keeping accurate records of quotes, receipts, sums paid, invoices and more, throughout the construction period is bound to minimise the likelihood of dispute occurring. When there is such uncertainty, organisation and proof is key. Any provision of money and any transactions MUST be recorded. This is of vital importance. Both owner and builder should accept this as a common practice. Any transactions completed by the builder should be provided to the owner and vice versa. Communication is also key, and the owner and builder should constantly correspond about what has been done, what has been bought and any other transactions made. The owner has full entitlement to view any invoices, receipts, documents and a record of all payments made. If they think something is unreasonable, or is at an excessive cost, perhaps a material that has been purchased, they may query or dispute this.
There is no doubt that the building process is stressful for every party involved, particularly if you are uncertain as to your entitlements and unaware of dangers. Domestic Building contracts are binding when signed, so it would be prudent to seek legal advice before signing one, in particular a Cost- plus contract. Legal professionals will be able to adequately advise you on what to look out for and what to do pre commencement to the contract. For exceptional advice on such topics, call Boutique Lawyers on 1300 556 140 or alternatively visit our website; www.boutiquelawyer.com.au, and submit your enquiry.