Warning - cost plus and construction management contracts
Cost plus contracts and construction management contracts are two types of contracts which, although more commonly associated with commercial building projects, may legally be used for domestic building work in Queensland.
However, because both of these contract models involve added responsibility and risk for both parties and reduced protection for homeowners under the Queensland Home Warranty Scheme, the QBCC strongly recommends home owners and contractors obtain formal legal advice before agreeing to use either of these contracts for domestic building work.
Cost plus contracts
A cost plus contract is defined in section 1 of Schedule 1B of the Queensland Building and Construction Commission Act 1991 (QBCC Act) as ‘...a domestic building contract under which the amount the building contractor is to receive under the contract cannot be accurately calculated when the contract is entered into, even if prime cost items and provisional sums are ignored’.
Typically, under this contract type, the amount the home owner will have to pay will be the actual costs incurred by the contractor (e.g. the amount a building contractor pays for materials and to their subcontractors) plus a percentage of those costs, or an added fee, to cover the contractor’s overheads and profit. As an example, the contract price may be described as ‘cost plus 20%’.
Cost plus contracts carry heightened risks for home owners because of the lack of certainty regarding the final cost of the project.
In fact, because the contractor’s payment claims under this type of contract are usually based on their costs plus a percentage of those costs, there is actually a disincentive for the contractor to minimise costs. The greater the cost base, the more money the contractor will receive from their margin.
The high incidence of disputes associated with the use of this contract model is also a risk for both parties.
Reports and complaints to the QBCC over many years suggest that the final costs under a cost plus contract are often considerably more than the home owners anticipated at the beginning of their building project, sometimes more than double their expectation.
Construction management contracts
There are different versions of the construction management contract model. A common feature of some versions is that the home owner is required to sign contracts directly with a range of trade contractors (e.g. plumbers, carpenters, etc.). These trade contractors are to be supervised and coordinated by a construction manager (a licensed builder) with whom the home owner will have a separate contract.
Under this arrangement, the home owner is likely to have much more responsibility and greater exposure to financial and legal risk than under the usual domestic building arrangement where they have only one contract with a builder as head contractor.
A breakdown in the construction management contract, or one of the trade contracts, may have a flow-on impact on other trade contracts in which the home owner is involved, potentially leaving the home owner exposed to delays and costly legal action.
If the construction management contract with the overseeing builder is terminated for any reason, all trade contractors will need to stop work due to lack of supervision until the home owner appoints a new construction manager.
These complications are in contrast to the more common and simpler domestic building contract arrangement where the home owner contracts solely with a builder as head contractor who then contracts with trade contractors and both manages and supervises their work on the home owner’s behalf. In this case, any problems associated with the subcontracts are the builder’s responsibility, not the home owner’s.
Warning for owners
It is very important for home owners to note that, as a consequence of the uncertainty surrounding the final contract price for both of these types of contracts, assistance for non-completion under the Queensland Home Warranty Scheme (QHWS) (i.e. where another contractor is required to complete unfinished work) is generally not available to home owners when cost plus or construction management contracts are used.
Warning for contractors
Both of these contract formats have potential risks for contractors. The uncertainty about the final price heightens the need for contractors to be diligent in assessing the financial capacity of their clients.
Depending on the terms of the particular contract, a risk associated with construction management contracts could include the construction manager being contractually responsible for matters, such as the performance of the trade contractors.
Over which they have reduced control as compared to the more common domestic building contract under which, as head contractor, they contract directly with and pay the trade contractors.
Construction managers also need to be aware that even where the home owner is contracting directly with the construction management trade contractors, as licensed builders they will be responsible for overall supervision of the whole project and retain accountability for any defective work.
In addition, construction managers should note that they are responsible for arranging, collecting and passing the QHWS premium on to the QBCC based on the full value of the total project, not just for the value of their construction management contract.
For further information
This information is general in nature. For advice on particular contracts or their individual circumstances, home owners and contractors should obtain formal legal advice from a practising solicitor before signing the contract.
You can also download our Domestic Building Contracts – General information for owners and contractors guide (PDF). It has useful information on other contract matters and topics related to domestic building and renovating.