When Cost Plus Contracts Are Lawful in South Australia

What it is

South Australia is one of the friendlier states for cost plus contracts, but it is not a free-for-all. Section 29 of the Building Work Contractors Act 1995 (SA) permits cost plus with a hard cap on the margin, and the same 15 per cent number governs the surcharge on any prime cost item. Get those two constraints right and cost plus is lawful at any contract value. Get them wrong and the contract is unenforceable to the extent of the excess.

The Act's approach reads as the mirror image of Victoria, which bans cost plus below $1,000,000 under section 13 of the Domestic Building Contracts Act 1995 (Vic). South Australia does not use a threshold. It uses a percentage.

Section 29 permits cost plus with a capped margin

Section 29(1) of the BWCA does two things. It permits a builder to charge on a cost plus basis where the contract so provides. It caps the margin the builder may add to the actual cost at 15 per cent.

The cap is the entire regulatory device. Provided the margin sits at or below 15 per cent and the contract states the cost plus method clearly, the arrangement is lawful. There is no requirement that the contract exceed a dollar threshold, no requirement of a reasonably estimated total and no ministerial approval to obtain.

Where the contract as written exceeds 15 per cent, the excess is unrecoverable. Section 29 is not a criminal offence provision. Its bite comes from the recovery consequence and from the Consumer and Business Services compliance pathway.

The 15 per cent also caps prime cost surcharges

The same 15 per cent number governs a related area. Section 29(1) caps the surcharge a builder may add to a prime cost item at 15 per cent of the actual cost of the item. A prime cost item is a nominated allowance in the contract for something the owner will select later, such as tiles, tapware or joinery. When the actual price of the item comes in above the allowance, the builder can pass the extra on plus a margin. The margin is capped at 15 per cent of the actual cost.

That is a different application of the same figure. Cost plus governs the entire contract. Prime cost governs one line item inside an otherwise fixed contract. A builder running a fixed price contract with 12 prime cost items is subject to the 15 per cent cap on each item, not on the contract as a whole.

Rise-and-fall needs a completion date

Section 29(3) and section 29(4) permit rise-and-fall pricing only where the contract has a completion date. The clause can operate against nominated cost indicators or against actual price movements in identified inputs, but the trigger is the presence of a fixed completion date on the face of the contract.

Without a completion date the rise-and-fall clause is not permitted, and any price adjustment made under it is unrecoverable. That is a common trap on cost plus contracts because a cost plus contract is often loose on the completion date to begin with. Combining cost plus and rise-and-fall in one contract without a fixed completion date fails on both fronts.

The "THIS PRICE MAY CHANGE" notice

Section 29 works with section 28. Where the contract price can change, whether under a cost plus method, a prime cost surcharge or a rise-and-fall clause, the words "THIS PRICE MAY CHANGE" or "ESTIMATE ONLY" must appear adjacent to the price. Where several such prices appear in the contract, they must be listed together for the notice.

Consumer and Business Services publishes the requirement in Form 1. A cost plus contract that omits the adjacent notice is exposed to the section 36(5)(b) extended termination right, because the notice is treated as a relevant Act provision the builder failed to comply with.

What happens if you exceed the cap

Two consequences run in parallel.

The first is contractual. To the extent that a demand exceeds the 15 per cent margin, the builder cannot recover the excess. Section 42 voids any term purporting to exclude the operation of the Act, so a contract clause reciting a 20 per cent margin does not overcome section 29(1). CBS may recommend the owner refuse payment above the cap and the Magistrates Court will support that position.

The second is regulatory. The Commissioner for Consumer Affairs may investigate under Part 5 of the Act, publish complaint outcomes and take licensing action where a pattern of non-compliance emerges. A single overcharge is more likely to be a civil dispute. A repeated one flows into licensing consequences.

How South Australia compares

• NSW: cost plus is expressly permitted under section 8A(2)(b) of the Home Building Act 1989 (NSW) with no cap on the margin, subject to documentation.
• VIC: cost plus is an offence carrying 100 penalty units unless the reasonably estimated cost is $1,000,000 or more or the renovation exception applies, under section 13 of the Domestic Building Contracts Act 1995 (Vic).
• QLD: cost plus is permitted with no percentage cap, but the QBCC treats an unusual margin as a marker of contract risk.
• WA: cost plus sits outside the HBCA band regime under sections 3 and 14, provided the contract is headed "cost plus contract" with an acknowledgment that most HBCA protections do not apply.
• SA: cost plus is permitted at any value, margin capped at 15 per cent under section 29(1).

Only South Australia and, in a different way, Victoria regulate the arithmetic of cost plus itself. Every other state regulates the mechanics but leaves the number to the market.