Are Cost Plus Contracts Lawful in WA?

What it is

Cost plus is lawful in Western Australia. It is also, by deliberate legislative design, almost entirely unregulated. That is the opposite of the New South Wales position.

Cost plus sits outside the Act by definition

The Home Building Contracts Act 1991 (WA) turns on a defined term. Section 3(1) says contract means a home building work contract, and defines that as a contract between a builder and an owner for home building work but does not include a cost plus contract.

A cost plus contract is separately defined: the builder recovers the actual cost of materials and work, plus a percentage of that cost, a specified sum or both.

Because every operative section of the Act uses the word contract, excluding cost plus from that definition excludes cost plus from nearly the whole Act.

What section 14 actually requires

Section 14 is the carve-back, and it is short. A builder must not enter a cost plus contract with an owner for home building work unless the contract is in writing and:

• has a heading at the beginning that includes the words "cost plus contract"; and
• contains an acknowledgment by the parties that the contract is a cost plus contract and that the Act, apart from section 14 and Part 3A, does not apply to the contract.

The penalty is $10,000, and regulation 8 makes it an infringement notice offence with a modified penalty of $1,000. Section 14(3) lets the owner terminate under section 19 if the builder gets it wrong.

So the statutory requirement is a label and a warning. Nothing more.

Where the section 10 payment rules land

They do not land, and this is the point most often stated incorrectly.

Section 10 caps the deposit at 6.5 per cent and confines post-commencement payments to genuine progress payments for work already performed. Section 10 applies to a contract, and a cost plus contract is not one. The Act says so twice: through the section 3 definition, and through the acknowledgment section 14(1)(b) forces into the document.

The prescribed Notice for the Home Owner puts it in plain words. The Act does not apply to a cost plus contract except for the home indemnity insurance requirement.

So a WA cost plus contract is not constrained by the 6.5 per cent deposit cap, the genuine progress payment rule, the section 12 prime cost duty, the section 13 rise-and-fall prohibition or the section 11 defects term. WA neither bans cost plus nor polices its payments. It requires the owner to be told the protections are gone.

Home Indemnity Insurance on a cost plus job

Part 3A is the one substantive obligation that survives. Section 25A defines building contract to include a cost plus contract, and residential building work above the $20,000 minimum amount prescribed by regulation 7 attracts the section 25C duty to hold a policy before any payment or any work.

The cover is narrower than on a fixed price job. Section 25D(1)(a), which insures loss of deposit up to $40,000 and loss from non-completion, applies only to work under a residential building work contract, and section 25A defines that term as a contract other than a cost plus contract. Section 25D(1)(b), which insures against being unable to enforce a building remedy order, applies whether or not such a contract exists.

The prescribed Notice states the result directly. On a cost plus contract the builder must take out home indemnity insurance covering only the failure to rectify faulty or unsatisfactory building work. No deposit cover. No non-completion cover.

What the owner keeps

Not nothing. Building service complaints under the Building Services (Complaint Resolution and Administration) Act 2011 are about the work rather than the contract, so an owner on a cost plus job can still complain to the Building Commissioner about the standard of the work.

How NSW does it differently

NSW keeps cost plus inside the tent. Section 8A(2)(b) of the Home Building Act 1989 (NSW) expressly authorises a progress payment for work already performed or costs already incurred, which may include the addition of a margin, supported by invoices and payable on an as invoiced basis. Cost plus is a permitted payment structure there, not an exit from the Act.

The NSW deposit cap still bites too. Section 8 fixes the maximum deposit at 10 per cent of the contract price however the payments are structured.

That is the whole difference. NSW regulates the cost plus mechanism. WA excludes the cost plus contract.