A cost plus contract is a contract commonly used in the building industry that allows for payment of direct costs of the work (e.g. labour and materials) to a set limit plus an agreed percentage or fixed sum (sometimes referred to as the “builder’s fee”). Such a contract can be a useful alternative to a fixed price contract if they are administered correctly.
However, there are several misconceptions about how to use a cost plus contract. Frequently these misconceptions lead to disputes between the parties, which could have been avoided if the contract had been administered properly.
Having a good understanding of the legal and contractual requirements of using a cost plus contract can minimise the likelihood of a disputes arising. Some of the common misconceptions are detailed in the below table:
Common Misconceptions
| MISCONCEPTION | ACTUAL REQUIREMENT |
| The builder may only recover their own time under the “builder’s fee”. | A builder may charge and recover their time for supervising or carrying out work under the direct costs component. |
| Residential building work can be carried out on a contingent basis using a cost plus contract allowing the client to decide what they want along the way. | All residential building contracts must provide a detailed description of the works to which the contract relates. Therefore, the works to be carried out must be agreed upon and specified in the contract. Any relevant plans must also be included in the contract. Failure to abide by these requirements renders the contract unenforceable by the builder, whilst the client’s rights remains unaffected. |
| No variations are required under a cost plus contract because the client can provide further work along the way. | Cost plus contract must be evidenced in writing and signed by both parties. Any variations made to the scope of works must be approved by the builder and the client. Without a variation in writing the builder may not be able to recover the costs for work completed. |
If you require any further information in regards to cost plus contracting, please contact our team of lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.
