Unexpected Increases in the Contract Price

Are you a builder who has experienced the owner continuously requesting variations to the Contract? If so, did you know that if the contract price has increased by more than 15% there is a legal remedy pursuant to the Domestic Building Contracts Act 1995 (Vic) (the “Act”)?

Builders would be prudent to remember that the Act contains many provisions which seek to protect owners from unfair practices by builders. In particular, the deliberate underquoting of additional costs. One of these provisions is s 16(1) of the Act which makes it an offence for a builder who enters into a domestic building contract to ‘demand, recover or retain from the building owner an amount of money in excess of the contract price unless authorised to so by [the] Act’.

In almost every domestic building project, variations are required. These variations are either requested by the owner, or the builder.

Where the parties have entered into a fixed fee contract, the contract can be validly increased under the Act on the following grounds:

• builder or owner requested variations (ss 37-39);

• prime cost or the amount of the provisional sum allowance included in the contract; and

• where unforeseen additional work is required in relation to the footings (s 30).

Notwithstanding the above, s 41 confers a right on owners to terminate the contract if the contract price increases by 15% and the cost was something which could not have been reasonably foreseen by the builder on the date that the contract was made. However, variations made by the owner (s 38); prime cost items; and provisional sums are excluded from this 15% calculation (s 41(2)).

Section 41(5) of the Act provides that if a contract is brought to an end under s 41, “the builder is entitled to a reasonable price [emphasis added] for the work carried out to the date the contract is ended”. The expression ‘reasonable price’ is not, however, defined under the Act.

Unfortunately for builders, s 41(6) puts a ceiling on the amount recoverable under s 41(5) at the amount the builder would have been entitled to recover under the contract. Furthermore, s 53(1) of the Act advances that VCAT may make any order that it considers fair.

In the case of Verve Constructions Pty Ltd v Visser [2012] VCAT 284 (“Verve”), VCAT made an assessment of the amount recoverable in accordance with these provisions.

Deputy President Lulham interpreted ‘a reasonable price’ as a fair value for the work performed by the builder and reiterated that termination under s 41 is a statutory right, and thus no claim in damages flows from termination under the statute.

Deputy President Lulham highlighted the fact that the price ceiling contained in s 46(1) could operate to reduce a quantum meruit claim where the quantum would exceed that which was recoverable under the Act. In Verve, Deputy President Lulham accepted an amount claimed as the ‘value’ of the work, not the contract, and applied market rates dated to the time of the tender of the contract as opposed to the mid-point of the construction period, to represent a ‘reasonable price’.

If you are a builder and you are dealing with these issues, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870, or visit our website at www.mclp.com.au or our Facebook Page at http://goo.gl/Jx2hdO.

This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.