When is the estimated cost of building work not the contract price?

Case Summary: May21 Pty Ltd v Building Appeals Board [2023] VSC 203

On 20 April 2023, the Supreme Court of Victoria decided that the Building Appeals Board’s determination regarding the estimated cost of building work for the purposes of a building permit under the Building Act 1993 (Vic) (Act) was incorrect. This decision is significant for developers in Victoria and for building surveyors as it sheds light on how the issue of determining the value of building works for the purposes of deciding the levy for a building permit should be properly approached under the Act. This decision has implications as to the amount of the levy payable for a building permit.

Background

May21 Pty Ltd and FEC May22 Pty Ltd, part of the Far East Consortium, (together, Developers) were developers of a project in Melbourne. The Developers entered into a contract with Multiplex Constructions Pty Ltd (Builder) for design and construction works at ‘West Side Place’ located at 250 Spencer Street, Melbourne (Works). The total contract price for the Works was $660,982,768 (Total Contract Price).

On behalf of the Developers, the Builder applied for a ‘staged permit’ (Permit) for the Works under section 205H(1A) of the Act. The Developers engaged a building surveyor (Surveyor) to assess their application for a Permit.

Section 205H(1A) of the Act provides that for an application for a stage building permit, the application must:

‘(a)    specify the contract price for the whole of the building work (including the cost of labour and materials), if there is a contract for the whole of the building work; or

(b)   in any other case, include sufficient information to enable the relevant building surveyor to estimate the cost of the whole of the building work (including the cost of labour and materials).’

The Surveyor estimated that the cost of the Works was the same as the Total Contract Price set out in the construction contract. The Surveyor consequently determined that the estimated cost of the Works was inclusive of components such as GST, preliminaries, profit, and other matters considered to be non-building works costs/expenses. The Surveyor considered that these components were required to be included in the Total Contract Price and relied upon the guidance of the Victorian Building Authority (VBA).

The Developer disputed the need for these components to be included in the estimated total cost of the Works.

In the interest of time, the Developer paid the levy to the VBA based on the Surveyor’s determination and appealed that determination to the Building Appeals Board (Board). The basis of this appeal was that the Total Contract Price incorrectly adopted the contract price and included the price for non-building works under the Act. The Developer requested a refund of the overpaid levy.

Building Appeals Board – Original Decision 

The Board is a statutory body established under the Act that has the power to determine disputes arising under the Act. On 3 October 2022 the Board determined that the relevant building surveyor must estimate ‘the cost of the whole of the building work (including costs of labour and materials)’, under section 205I(2)(a)(i) of the Act, by reference only to the contract price set out in the construction contract (Board’s Determination). VBA agreed with the Board’s Determination.

Supreme Court of Victoria – Judicial Review

The Developer applied to the Supreme Court of Victoria for judicial review of the Board’s Determination on the basis that there has been an error of law on the face of the record, specifically, that section 205I(2)(a)(i) of the Act was misinterpreted by the Board. The VBA opposed the appeal and made ten (10) submissions which included that the Developer’s construction of section 205I(2)(a)(i) would require building surveyors to ‘undertake lengthy and burdensome exercises of estimation before issuing building permits.’

Stynes J of the Supreme Court quashed the Board’s Determination and found that section 205I(2)(a)(i) of the Act does not provide that the relevant building surveyor is required to adopt the contract price.

In its process of review, the Court relied on the wording of section 205I(2)(a)(i) and the intention of Parliament, specifically that this section could have expressly required the adoption of the contract price where there is a contract, but that it does not require this to occur.

The task of producing an estimate is entrusted to the relevant building surveyor, who has the necessary skills to estimate a baseline for the calculation of the levy and possesses relevant information about the building work that is subject to the permit application. The estimate will then be given to the Authority and the Authority will calculate the amount of the levy payable per section 205G of the Act. The levy is calculated by reference to the cost of the building work for which the permit is required.

Stynes J stated that the cost estimate ‘must bear an intelligible relationship to the building work (as defined by the Act) that is to be permitted’. In this context, regard can be given to the contract price as well as other information describing the building works.

The Court held that section 205I of the Act does not require the relevant building surveyor to undertake lengthy and burdensome exercises of estimation. This is because the Act does not prescribe a method to be used by the relevant building surveyor when producing an estimate, but the Act allows the relevant building surveyor to decide what method is within their skillset. In approaching this task Stynes J held that: ‘The method they choose to use may be as complex or as simple as the demands of the relevant application dictate.’

Essentially, the wording in section 205H(1A)(a) of the Act that states, ‘specify the contract price for the whole of the building work’, is directed to the applicant of the permit and the contract price does not limit or define the task of estimation to be undertaken by the building surveyor under section 205I.

Therefore, section 205I(2)(a)(i) of Act was interpreted by Stynes J to mean that, if there is a contract price for the whole of the building work, the relevant building surveyor must have regard to the contract price specified, but, in doing so, the relevant building surveyor is not confined or limited to that price when estimating the cost of the whole of the building work.

The Court remitted the matter back to the Board to consider and determine the issue in accordance with the proper construction of the Act. In making this decision the Court declined to answer other questions put to the Court as they had not been determined by the Board and were therefore not subject to judicial review. These questions included whether GST, builder’s margin and other heads of costs/expenses such as consultant’s fees were relevant to the building surveyor’s determination of the cost of the building work under section 205I of the Act.

Takeaways from the decision

The Court’s decision will impact the decision-making process that a relevant building surveyor must employ when determining the estimated cost of building works under the Act for the purposes of applying for a building permit. The decision makes it clear that a relevant building surveyor must ensure they are not relying solely on the contract price when producing an estimate of the cost of the building works. Instead, the relevant building surveyor must properly undertake a skilled method of estimating the cost of the building works having regard to, but not being limited or confined to, the price set for the works in the construction contract.

This decision potentially opens the door for developers/principals to seek to challenge previous determinations of the cost of building works under building permits and thereby seek the refund of elements of levies paid to the government for building permits. This may or may not be commercially feasible for developers/principals.

The Court did not determine the specific issue of whether GST, builder’s margin and other heads of costs/expenses such as for plumbing and electrical works and consulting fees were relevant to the building surveyor’s determination of the cost of the building work under section 205I of the Act. It is possible that there may be more dispute or litigation on these issues particularly for projects with a significant value and associated building permit levy.

There is of course the possibility that the Victorian government may pass legislation amending the Act and, for example:

• clarifying that the contract price set out in the construction contract is deemed to be the relevant point of reference for the determination of the value of the works for the purposes of a building permit application; and/or
• providing certainty as to what categories of works and costs/expenses fall within the definition of the cost of the building work for the purposes of section 205I of the Act.

Queries

For further information regarding this article, please contact the authors or any member of our Building & Construction team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.