NSW: Q&A What does a "costs plus" building contract mean?

This article is about the risks and complexities of a costs plus building contract, especially when there is a lack of transparency and proper documentation.

Question: Our builder suggested a costs plus building contract and quoted $80K. Three weeks later, he presented us with a claim of $160K with little evidence of expenses. Are we required to pay?

Does a “costs plus” building contract mean we pay actual costs plus a fee?

A builder did concrete cancer remedial works. He presented a costs plus building contract and quoted $80K. Three weeks later, he presented us with a claim of $160K. His evidence of costs consists of photos of the works and empty concrete bags. He refuses to show us receipts, and his claim does not include any line items for labour. Instead, his bags of cement cost ~$550 each.

Are we entitled to see his costs? How do we dispute the claim?

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Answer: This is a good example of why project managers are essential.

Cost plus is a broad term and may be misrepresented, depending on who uses it and their angle when using the term.

It can be a transparent means of tracking actual cost and guaranteeing a contractor their agreed margin, for which they will present actual invoices as evidence and an invoice with their agreed markup. Typically, the markup is limited/lower as the risk to the contractor is low, and their margin is guaranteed.

It may be meant as do-and-charge. In this instance, it sounds like there should have been an agreed schedule of rates for concrete repairs (should be per litre of repair with a minimum limit). With that, the contractors should provide details of the areas being repaired and demonstrate, with supporting evidence, the litres applied to make the repairs. Typically, in such a project, an engineer is involved and should be able to verify the claims based on the areas and depth of the repairs undertaken.

If there is neither transparent evidence of cost, nor a fixed schedule of rates to bill against, you are in a bit of a predicament. Given the size of the numbers, it may be worthwhile engaging a quantity surveyor to assess the claim made by the builder and ensure all parties are fair and reasonable in their approach. If an engineer is acting on behalf of the owners corporation, they may be able to assist.

Note, pending which contract the works are being managed by, the owners need to ensure not to default on the contract in the interim. If unsure, I suggest the owners corporation obtain legal advice and comply with the Security of Payment Act and other legislation.

This is a good example of why project managers are essential. Such works would never be permitted to progress to such an extent without understanding of the works and informing the client of budgets, etc., accordingly. To set up a project for success and allow for management of expectations:

Obtain an engineer’s scope of works from the outset (even if minimal work is required, a condition report and basic specification should be the minimum that quotes are based on as it allows for quantification of the project),

Undertake a fair tender process,

Have a construction industry contract drafted, such as AS4000 or AS4905 (Note: Master Builders or other industry contracts are skewed in favour of contractors),

Engage professional representation in the form of an independent project manager / superintendent to manage the contract, and the project works through to defect management and completion.

Dominic Dodwell
Valen Projects
E: dominic@valenprojects.com.au
P: 0488 666 682

This post appears in the December 2024 edition of The NSW Strata Magazine.

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