When Cost Plus Contracts Are Lawful in Victoria

What it is

A cost plus contract prices the work as actual cost plus a margin, rather than a fixed sum agreed up front. In New South Wales that is an ordinary, lawful way to contract for residential building work. In Victoria it is an offence unless the job clears a threshold that rules out almost every renovation, extension or new home in the state.

Section 13 of the Domestic Building Contracts Act 1995 (Vic) is the prohibition. Regulation 10 of the Domestic Building Contracts Regulations 2017 supplies the number.

The $1,000,000 gate

Section 13(1) makes it an offence for a builder to enter a cost plus contract unless one of two things is true: the contract is of a class allowed by the regulations, or the renovation exception in section 13(1)(b) applies. The penalty is 100 penalty units.

Regulation 10 defines the allowed classes:

• contracts entered into before 1 August 2017 reasonably estimated to cost $500,000 or more
• contracts entered into on or after 1 August 2017 reasonably estimated to cost $1,000,000 or more
• domestic building contracts for public construction where the Crown or a public entity is a party

For any Victorian job contracted today the operative figure is $1,000,000. Consumer Affairs Victoria states it directly: the threshold amount above which cost plus contracts are permitted is $1 million. Below that, charging by the hour with no fixed price is not a commercial preference. It is an offence.

The renovation exception is narrower than it looks

Section 13(1)(b) allows a cost plus contract where the work involves the renovation, restoration or refurbishment of an existing building and it is not possible to calculate the cost of a substantial part of the work without carrying out some domestic building work. The classic case is not knowing what sits behind the wall until the wall comes off.

Builders read that as a licence to run the whole renovation on cost plus. Consumer Affairs Victoria closes the reading off. A cost plus contract may be used when renovating an existing house, but only to cover the investigative work required to establish the contract price. A fixed-price contract must then be entered with the client for the remaining work.

So the exception buys the exploratory phase. It does not buy the build.

The estimate is a second, separate offence

Section 13(2) gets missed because it sits behind section 13(1). Even where the cost plus contract is permitted, the builder must not enter it unless it contains a fair and reasonable estimate by the builder of the total amount the builder is likely to receive under the contract. Another 100 penalty units.

Two offences, then. Using cost plus where it is not allowed. Using cost plus where it is allowed, without the estimate.

What happens if you use cost plus anyway

Section 13(3) is the provision that hurts. Where a builder fails to comply with section 13:

• the builder cannot enforce the contract against the building owner
• VCAT may award the builder the cost of carrying out the work plus a reasonable profit, if VCAT considers it would not be unfair to the building owner to do so

Read those two limbs together. The contract is gone as a source of rights. What is left is a discretionary VCAT award, conditioned on a fairness test the builder does not control, assessed long after the money was spent. That is the opposite of the certainty cost plus is supposed to give the builder.

This also sits against section 133, which says non-compliance with the Act does not make a contract illegal, void or unenforceable unless a contrary intention appears. Section 13(3) is one of the few places where that contrary intention appears in terms.

Why NSW is the mirror image

Section 8A of the Home Building Act 1989 (NSW) authorises three kinds of progress payment. The second is the cost plus limb: 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 claims supported by such invoices, receipts or other documents as may be reasonably necessary, payable at intervals fixed by the contract or on an as-invoiced basis.

That single paragraph makes cost plus lawful in NSW at any contract value, with an express blessing for the margin. NSW regulates cost plus by demanding documentation. Victoria regulates it by banning it below $1,000,000.

For a builder working both states this is the most dangerous assumption to carry across the border. A NSW cost plus contract, perfectly valid in Sydney, is an offence in Melbourne at 100 penalty units. It is also unenforceable under section 13(3)(a) the moment the owner declines to pay.