Could Cost-Plus contracts help protect Domestic Builders during an economic downturn?

Written by

Melbourne Quantity Surveyors

15 August 2023

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2 min read

Hallbury Homes recently announced they were entering into voluntary administration, leaving hundreds of creditors unlikely to receive a cent of their lost money, and 60+ homeowners with incomplete projects. Unfortunately, the past 6 months has seen a slew of Builders in a similar position, with some companies facing financial ruin and unable to turn a profit because of current market rates, supply chain disruptions, skilled labour shortages, increasing costs of materials and logistics, and extreme weather events.

It makes us wonder, is it time for the Government and the Banks to reconsider their position on Cost-Plus contracts for smaller residential builds?

In 2017, the regulations for Cost-Plus contracts changed in Victoria. Before 1 August 2017 a Cost-Plus contract could be entered into for domestic building works reasonably estimated to be $500,000, however after 1 August 2017 that contract estimate was increased to $1,000,000. In conjunction to this change, banks are often unwilling or hesitant to lend money for a project that has a Cost-Plus contract because they can be open-ended if a project spirals over time and over budget.

With the global economy facing uncertain times ahead, not only can a Cost-Plus contact benefit the Builder and help protect them from significant losses, it can also benefit the Owner financially as a Builder has no need to overprice a job to cover profit for any unknowns. The Owner only pays for works that are undertaken by the Builder, and its transparent nature means Owners can clearly see what works have been completed, what materials have been purchased and the direct labour costs.

In Europe, Cost-Plus contracts are commonplace and work well to help protect both the Builder and Owner. If the Builder is more likely to make a profit on the project it should improve the quality and productivity of the build, whilst relieving the pressure on the Builder whose profit is being eaten away by increases in labour and material costs across the lifespan of the project.

If we want to slow the rate of good Builders going bankrupt during this unstable financial period, it is time for the Government and lenders to take another look at domestic building contracts, as it appears the standard forms of contracts are a major contributing factor to builder bankruptcy. This could see the re-emergence of Cost-Plus contracts for domestic building works under $1,000,000.