What is the HIA Cost Plus Building Contract?
In New South Wales and in each state, the HIA has created a Cost Plus contract template that aims to be compliant with the state or territory’s laws.
In New South Wales, the HIA Cost Plus contract complies with the Home Building Act 1989, New South Wales.
What Must Be Included in the HIA Cost Plus Building Contract?
The HIA Cost Plus contract NSW must:
- Specify the names of the parties and the builder’s license number
- Contain a sufficient description of the works, including plans and specifications
- Show the calculation methodology for the contract price
- Reference to the Section 18b Warranties of the Home Building Act
- Have HBCF insurance compliance
- Have a statement regarding the Owner’s right to the Cooling Off Period
- The events that give rise to the parties’ right to terminate the contract
- The contract must also include the New South Wales Government’s checklist
- The Consumer Building Guide
- The role of the Registered Certifiers Statement
- And the Security of Payment law guide
Home owners should be careful with reviewing their Cost Plus contract, to ensure that the work that the Builder can claim is limited to work which directly results in the construction of the building. Many Builders try to claim for work which is Administrative, or has ulterior benefit to the Builder. Home-owners should not agree to pay for costs that are not for physical Construction work. The other work is overhead work which should form part of the Builder’s profit margin and overhead.
Home owners should ensure that the payment terms are properly and clearly defined.
When Should HIA Cost Plus Contracts Be Used?
Homeowners should try their best to avoid using the HIA Cost plus contract. Home owners should only consider using the HIA Cost plus contract in circumstances where the scope of works are not possible to be known. For example, where the work is a renovation and it is not possible to know what is behind the walls and significant destructive work is carried out.
Otherwise another example where the HIA Cost plus contract may be considered is when the home owners have engaged with an architect or a designer and want to make their selections as the project is built and brought to life. It goes without saying that it is more likely than not that a HIA Cost plus contract is favorable to the Builder and will likely cause a homeowner to pay more for the same work if the Builder provided the work subject to a fixed price contract. That is because the homeowner could get competitive quotes from contractors and know with certainty what the fixed price contract price is.
Who Benefits in a HIA Cost Plus Contract?
The HIA Cost Plus contract arrangement benefits homeowners; they require flexibility with the scope of work as the works are progressing, and in circumstances where the scope of work cannot be known at the time of contracting.
Otherwise, the person who benefits under the HIA Cost Plus contract is the Builder. That is because the Builder certainly will make his profit. There is no more no risk to the Builder because he simply charges his costs and receives his guaranteed Builder’s margin.
What Can Homeowners Do To Manage Risks Under a HIA Cost Plus Contract?
Homeowners should require the Builder to provide a fixed Builder’s margin for the whole build under the HIA Cost Plus contract. The HIA Cost Plus contract in its current form permits the Builder to claim an infinite amount of Builder’s margin. So as long as the actual cost to build the works increases, then the Builder’s margin also proportionately increases as a percentage.
Under a cost plus arrangement, a dishonest builder or contractor would benefit from their lack of effort. The contractors are incentivised by less productive work.
Homeowners should also properly administer the HIA Cost Plus contract, including (for example):
- through maintaining accurate records
- issuing timely and accurate instructions
- documenting the progress of the Works
- and regularly corresponding with the Builder.
The Owner may engage a Project Manager or other professional to assist the Owner in this matter.
The HIA Cost plus contract is subject to the Security of Payment law in New South Wales. The effect of this is that Builders can enforce their right to payment quickly and easily compared to having to go to the New South Wales Civil and Administrative Tribunal (NCAT) or Court. Homeowners that do not understand this law are exposed to overpaying builders.
As with any project, homeowners should keep a record of every event during the project. This may be done by way of diaries, regular photos of work progress, obtaining copies of quotes, obtaining site diaries, and/or emails between the parties and relevant people.
Home owners should consider engaging a Superintendent to help them to administer their contract and their contractual obligations.
How we can help
Contracts Specialist is led by a specialist construction lawyer with over 10 years experience in Construction Law. Our expertise includes Contract Review and Advice. Should you wish to have your residential construction contract looked over by a professional, or should you have any questions about your HIA contract, feel free to book a consult with us. First consult is free.