Variations to the original scope of work often incur additional costs. Understanding how these costs are calculated and the procedural requirements that must be followed is essential for both homeowners and builders. Under the Home Building Act 1989 (NSW) (the Act) and standard building contract terms, the pricing of variations is subject to specific legal and contractual rules. This article explores those rules and offers practical guidance for ensuring that variations are handled properly and fairly.
How Are Variation Costs Calculated?
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Contract-Based Pricing
Many residential building contracts specify how variation costs are to be calculated. If the contract outlines the pricing methods, those terms should be followed. Common contract provisions include:
- pre-agreed hourly or daily rates for labour;
- material costs plus a builder’s margin;
- a default margin of 20% for overhead and profit if not otherwise specified; and
- inclusion of GST in all prices.
This mechanism provides transparency and a consistent basis for calculating additional or reduced costs, subject to the terms are reasonable within industry standard.
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Labour and Materials
Labour costs may be determined based on:
- prices and rates listed in the contract schedule; or
- the Master Builders Association (MBA) published rates, where no rates are specified.
Material costs are usually calculated based on the actual costs to the builder, plus the agreed builder’s margin. Importantly, once materials are paid for by the homeowner, they become the homeowner’s property, even if they have not yet been installed.
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Market Rate Verification
In the absence of pre-agreed pricing in the contract, variation costs should reflect reasonable market rates. Builders may be required to:
- provide invoices from subcontractors;
- submit evidence of actual material purchases; and
- offer a detailed breakdown of labour rates and hours worked.
Homeowners can refer to the MBA published rates to have an idea on whether the contract specified labour rates are reasonable. This helps verify that the costs are fair and consistent with current industry pricing.
Adjustments to the Contract Price
Variation costs may result in either increase or decrease in the contract price, and the adjustments to the substituted works where existing work is replaced with something different from the original work which requires both an addition to and a deduction to the original scope of work. Regardless of which type of change to the contract and scope of work occurred, each change must be properly documented and reflected in the updated contract price to avoid any potential confusion.
Key Considerations for Homeowners and Builders
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Protect Yourself with Proper Documentation
- always get variations in writing before work starts;
- ensure variation notices include GST and builder’s margin; and
- keep detailed records of all correspondence and signed documents.
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Verify Market Rates
If you’re unsure whether a builder’s variation costs are reasonable:
- request multiple quotes or comparisons from other builders;
- ask for itemised breakdowns of materials, labour, and margins;
- consult industry associations such as the MBA or HIA for standardised rate guidance; and
- carefully review the variation calculations against the contract terms.
In summary, accurately pricing and properly documenting variations in home building contracts is crucial to ensuring that both homeowners and builders are treated fairly and that the project remains on budget and legally compliant. With clear communication, written agreements, and reference to agreed contract terms, costly disputes can often be avoided.
Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our social media accounts.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
