There are good reasons to use a cost-plus contract. They are typically flexible, allowing changes to designs, and they can provide better cost transparency meaning you generally know how much money your builder is making.
But there are significant disadvantages……. some of which may be a serious problem if your project is delayed, or the builder becomes insolvent.
What’s the big deal about cost-plus contracts?
Like everything in this world, there are pros and cons. There are good reasons to choose a cost-plus contract provided you have a good understanding of project administration and can manage costs.
Disadvantages of a Cost-Plus Contract
The problem, which is why we guess you are reading this, is one big disadvantage. You generally do not qualify for assistance for non-completion under the Queensland Home Warranty Scheme managed by the Queensland Building and Construction Commission.
This means that if there are difficulties with your project or the builder, requiring you to terminate the contract, you may be unable to claim on the home warranty insurance which could be up to $200,000.
The other big problem is managing costs and disagreements. It will be up to you to ensure that your budget is realistic, and you can manage decisions so that the project progresses smoothly. It is not uncommon for cost-plus projects to run significantly over budget, and you need to make sure you are diligently tracking costs and progress.
Advantages of a Cost-Plus Contract
There are some advantages to signing a Cost-Plus Contract. These contracts tend to be more flexible, and they allow you to change designs. Since they are more transparent, they also mean you usually know how much money the Builder is taking and how much is spent on materials etc.
Do the advantages outweigh the disadvantages?
The answer to this question is it depends. Considering the above, a Cost-Plus Contract certainly seems to have more risk as there is likely not a possibility for you to make a claim under the home warranty scheme. This could in particular be an issue if they Builder goes insolvent. Insolvency usually does not affect you being able to make a claim on the Home Warranty Scheme which is a big pro if your contract is not Cost-Plus.
Its important that you speak to a building and construction lawyer who is experienced in residential building. There are pros and cons to different contracts and its important you agree to the one that fits your particular project (and its various risks). Material Law are experienced building and construction lawyers who specialise in providing pre contract advice to homeowners and builders about these very issues.
We are always happy to discuss your project and help you understand the minefield which is residential building contract.