Contract Types and QBCC Insurance

Contract Types and QBCC Insurance

Please note, we are not solicitors, and this is our interpretation of the cost plus contract vs the fixed price contract.  Always seek legal advice prior to entering into any contract.

In QLD, any building works with a value of over $3,300 including GST must legally have a contract. This is regardless of whether it is a builder or an individual trade. It’s therefore in your best interest to understand the different contract types.

Why do you need a contract?  Basically, it protects everyone.  If you don’t have a contract you have very little recourse if anything goes wrong or there is a dispute between you and the contractor.  You also don’t have access to the QBCC Home Warranty Insurance Scheme.

QBCC Home Warranty Insurance Scheme

The Home Warranty Insurance is something that the builder or trade lodges on your behalf.  If the total cost of works including GST exceeds $3,300, the contractor must register a policy with the QBCC. The cost should be incorporated into their quote and contract. (Premiums start at about $220 for a job worth $3,300 and goes up incrementally).  So although the builder or trade lodges it, you as the consumer pay for it and it therefore protects you the consumer.  For more details on it and how it protects you please see: https://www.qbcc.qld.gov.au/home-warranty-insurance/home-warranty-insurance-explained.

To see if a contractor lodges the insurance policies (yes, there are contractors out there that don’t) do a license search on the QBCC website. Once you’re in the record select “Licensee’s Full History”. (Again, it doesn’t work in Chrome). Down at the very bottom you’ll see the licensee’s turnover as well as the number of policies lodged.  Keep in mind individual trades won’t lodge a policy unless the contract is between them and the owner directly.  For most building works, the contract is between the builder and the owner. The trade is then engaged by the builder.

Fixed Price Contracts

Fixed price contracts are the most common contract used.  The builder or trade gives you a fixed price to complete the works and should include a detailed scope of works.  Progress payments are based on a description of a stage completed. For example, Slab Stage or Framing Stage.  The builder can claim for variations under the contract in a number of circumstance including:

• items that cannot be foreseen
• items that are legally required for certification but not included in the original plans
• the owner changes their mind about something.

The QBCC Home Warranty Insurance is part of these contracts and cover you for defective works, non-completion and subsidence/settlement.  Most builders use a QBCC, HIA or Master Builders Contract.

Cost Plus Contracts

Cost Plus contracts are for the cost of the works plus an agreed builder’s margin.  Although builders love them because there is basically no risk for them, QLD didn’t allow them until 2015.  They are supposed to be used when the cost of a job cannot be accurately estimated even when you ignore Prime Cost and Provisional Sum items (think termite damage).  A few key elements to consider with a cost plus contract:

• progress payments are based on time, usually fortnightly, rather than the description of a stage. The builder must provide evidence of the costs.
• most banks do not lend money on cost plus contracts. 
• protection for non-completion under the Queensland Home Warranty Scheme is usually not available to owners who use these contracts. 

The QBCC don’t actually provide a template for cost plus contracts however the HIA do.  The QBCC says the following about them –

Cost plus contracts are particularly dangerous for owners because of the total lack of certainty regarding the final cost of the project. In fact, because the contractor’s payment claims are proportionate to the total cost of materials and subcontractor’s charges, there is actually a disincentive for the contractor to minimise those costs. The high incidence of serious disputes associated with the use of this contract format is also a risk for both parties. Reports to QBCC over many years suggest that the final costs under a cost plus contract are often considerably more than the owners anticipated (sometimes 50 – 100% greater than their expectation).

In summary, when considering contract types and QBCC Insurance, understand the differences between these contracts. And as with any contract, the most important thing is to read it and make sure you understand it.  It is trying to protect both parties in a fair and equitable manner.