When Cost Plus Contracts Are Lawful in New South Wales

What it is

A cost plus contract prices residential building work as the actual cost of labour and materials plus a margin, rather than a fixed sum agreed up front. Whether that is lawful depends on the state. In Victoria it is an offence below $1,000,000. In New South Wales it is expressly permitted, at any contract value, with no threshold and no ban.

The authority sits in section 8A of the Home Building Act 1989 (NSW). The rules on how to use it sit in Schedule 2 of the Act and in the reasonable-necessity language of section 8A itself.

The section 8A(2)(b) authority

Section 8A(2) says a contract for residential building work priced at more than $20,000 must contain a plain-language provision for the progress payments to be made under it. It then lists three lawful structures.

The second is cost plus. Section 8A(2)(b) authorises a payment for labour and materials in respect of work already performed or costs already incurred, which may include the addition of a margin, with provision for a claim for payment to be supported by such invoices, receipts or other documents as may be reasonably necessary to support the claim and with payment intervals fixed by the contract or on an as-invoiced basis.

Read those two phrases carefully. The words "may include the addition of a margin" are what make it cost plus rather than pure reimbursement. The words "reasonably necessary" are what stop the documentation trail from being either optional or crushing.

What the documentation duty actually demands

The section 8A(2)(b) documentation duty is not decorative. NSW guidance on progress payments treats each cost plus claim as unenforceable until the underlying cost is evidenced. Invoices, delivery dockets, timesheets and trade quotes are the ordinary evidence set.

Section 10 of the Act runs on top. Where the contract fails to comply with the essential requirements of the Act, the contractor cannot enforce it against the owner, but the owner can still enforce it against the contractor. A cost plus builder who cannot produce the invoices behind a claim is running the same risk in miniature. The payment claim fails while the owner keeps every warranty and rectification right the contract creates.

Where the margin sits

Section 8A does not cap the margin. That is a commercial term. What the Act does is subject the margin to the same reasonableness test that governs the rest of the claim. A margin without a stated method invites a Schedule 2 contract-terms argument. A margin bolted onto invoices marked up on the way in invites a section 92 argument if the effect is to disguise a payment demanded before insurance was issued.

The safer drafting is a fixed percentage disclosed on page 1, applied to documented costs, with a worked example.

Cost plus is not the same as rise and fall

The two ideas get confused. A rise-and-fall clause allows a fixed price to change against a nominated cost index. Section 7(5) requires a contract that permits the price to be varied to carry a warning of that fact on the first page and an explanation of each provision that authorises the change.

A cost plus contract does not need the section 7(5) warning because the price is the mechanism, not a variation of a set number. A hybrid contract that fixes some items and passes others through under a rise-and-fall does need the warning for the pass-through half, on pain of the price change being unenforceable.

How cost plus fails under NSW law

Three routes take a NSW cost plus contract from lawful to unenforceable.

The first is Schedule 2 Part 1. The written variations mechanism and the BCA-compliance provision are statutory terms. Any inconsistent contract term is unenforceable under section 7E. A cost plus contract that treats a scope change as a routine invoice adjustment, rather than a written signed variation, has bypassed Schedule 2 and the claim falls over.

The second is the Australian Consumer Law unfair contract terms regime, which applies in parallel. A margin that is unlimited on the upside, silent on evidence and combined with a broad discretion sits inside the standard-form definition and inside the significant-imbalance and detriment limbs of section 24 of the ACL. The clause is void.

The third is section 92 of the Home Building Act. No demand, payment or work is permitted before the certificate of home building compensation cover is given to the owner. On a cost plus job that constraint applies to the first invoice, not just to the deposit.

Why the Victorian position is the mirror image

The comparison worth carrying is with Victoria. Section 13 of the Domestic Building Contracts Act 1995 (Vic) makes cost plus an offence unless the reasonably estimated cost is $1,000,000 or more, or the work is renovation work where the cost of a substantial part cannot be calculated without doing some domestic building work first.

Regulation 10 of the Domestic Building Contracts Regulations 2017 (Vic) sets the $1,000,000 threshold for contracts entered on or after 1 August 2017. Consumer Affairs Victoria states the operative threshold as $1 million and warns that the renovation exception covers only the investigative work required to establish the contract price, after which the builder must move to a fixed price contract for the remainder.

A NSW cost plus contract, perfectly valid in Sydney, is an offence at 100 penalty units in Melbourne and is unenforceable against the owner under section 13(3) of the Victorian Act. A builder working both states cannot carry a single template across the border.