Administering contracts

Contract administration involves managing your contracts to make sure you comply with and fulfill the contract conditions. Good contract administration ensures customer satisfaction and minimises disputes.

Master Builders has developed a range of resources to help with the administration process, including:

Cost adjustment guidelines (commercial)

Rising costs in labour and building materials make it difficult to price building work. There's a risk that, during the course of a contract, the costs will rise or fall from the costs initially estimated. Generally, this risk can't be controlled.

To overcome this, contractors may end up pricing tenders conservatively or guess the effects of changes in costs.

To explain it even further, we've produced guidelines to explain cost adjustment, and provide sample cost adjustment provisions for inclusion in contracts where required.

Cost adjustment guidelines

Cost adjustment provisions in contracts address this risk by providing mechanisms for adjusting contract payment to reflect changes in costs, and apply to long-term costs and some specific costs. So, contractors retain the risk of short-term fluctuations in costs, and the risk of the calculated cost adjustment not reflecting actual changes in costs.

Applicable items

Cost adjustment may be applied to the following:

  • Labour and materials
  • Currency exchange rates for goods purchased in foreign currency
  • Other costs, including duties and taxes or shipping and transport.

In normal contracting strategies, cost adjustment provisions should only be applicable to costs, typically long-term costs that might cause tenderers to overestimate or uneconomically underestimate contract prices.

Considerations

For consistency, you should consider the following for all contracts:

  • Cost adjustment for labour and material may not normally apply in construction contracts less than 52 weeks in duration, and desirably should apply in contracts greater than 52 weeks duration.
  • Cost adjustment may be provided in construction contracts of less than 52 weeks duration in special circumstances, for example if the contract involves substantial materials or plant incorporating price sensitive metals or minerals, such as steel or copper.
  • Cost adjustment provisions for labour and materials may be based on the Australian Bureau of Statistics (ABS) indexes.
  • Separate provisions are required for adjustment to take account of changes in foreign exchange rate, customs duty, sales tax, ocean freight, marine insurance, overseas labour, and materials indexes.
  • The total proportion of the amounts payable under the contract that is subject to cost adjustment should be limited to 90%, the remaining 10%, representing profit and overheads, being fixed.

Note: A table showing the appropriate ABS indexes and proportions for labour and materials for selected common categories of work is included in the guidelines at Appendix A. Sample copies of ABS indexes for labour and materials are shown at Appendix F.

Home Warranty Scheme

All Queensland Building and Construction Commission (QBCC) licensees who perform residential construction work with an insurable value of more than $3,300 (including GST) must take out cover under the Queensland Home Warranty Scheme when working directly for owners.

Any QBCC licensee (builder/trade contractor), not just house builders, who carry out work directly for a residential owner, must collect a home warranty premium from the owner and pay it to the QBCC. The only exceptions are licensees working as subcontractors for a principal contractor, or working for a person who holds an owner-builder permit for the relevant construction.

This insurance provides home owners with cover for loss where the licensed contractor does not complete the contracted works or fails to rectify defective work.

Read more about how to handle the GST component of insurance premiums on the QBCC's website.

The following is a list of the types of work that are covered by the Home Warranty Insurance Schemer if for residential construction work with an insurable value of more than $3,300 (including GST), performed on a home or unit in a building with less than three storeys (excluding one floor if more than 50% of the floor is for accommodation of motor vehicles):

  • Construction of a new home, related roofed building (e.g. a garage), townhouse or multiple unit dwelling (no more than 3 storeys)
  • Extension, addition, alteration, renovation or repair of any of the above buildings
  • Replacement or refit of fixtures or fittings in a kitchen or bathroom
  • Work on a deck or verandah, attached to a residence
  • Building work that affects the structural integrity of the building
  • Work on or in the home or related roofed building (e.g. painting)
  • Work on a deck or verandah attached to a home or a related roofed building
  • Anything attached to the home or related roofed building and which requires building or plumbing approval
  • Any structure attached to the external part of a home or related roofed building which has no other supporting structure (e.g. awning, handrail)
  • Stairs or ramp which provide access, and are permanently attached to the home or related roofed building
  • Swimming pools.

A comprehensive list of the types of work that is insurable is available on the QBCC website.

Variations

Variations to the scope of the works under residential contracts may lead to an increase in the contract price. If the accumulative value of variations increase the contract price by $5,000 or more the contractor will have to pay an additional insurance premium. The contractor should make provision in the pricing of the variations for the addition premium. Payment of the additional premium must be made before the variation work is carried out.

To find out if your job should be covered, read the information about Insurable Residential Construction Work on the QBCC's website or call the QBCC on 1300 27 22 72.

Need more information?

If you haven’t found the answer to your questions on our website, give us a call or email us.

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