What is HBCF?
So what is HBCF and when is it legally required for a project to have HBCF in place?
In short, HBCF stands for Home Building Compensation Fund. Prior to 15th of January 2015, it was known more commonly by ‘home warranty insurance’. (Some people still refer to it as home warranty insurance to date)
It is compulsory for all residential projects to have HBCF in place when the contract work is over $20,000 and under 4 storeys high.
Most people seem to have a false understanding that HBCF is meant to serve as some sort of ‘insurance’ for their building project.
Whilst it is true that it serves to cover and protect the client in certain events (which we will cover in detail below), for most people it is simply a fee you must pay which provides you little to nothing in return.
It used to be that Builder could obtain HBCF from various insurance companies such as GIO, Allianz, QBE, Suncorp, just to name a few. (List of past providers can be found here)
However, on the 1st January 2018 the NSW Home Building Compensation Scheme took into effect and there is now only one company that provides HBCF, which is icare.
The irony of the name ‘icare’ is one that most Builders probably can relate and appreciate.
What does HBCF Cover?
As iCare phrases it: Certificate of Insurance issued by icare HBCF compensates homeowners for losses arising from defective and incomplete work where the builder or tradesperson:
- Becomes insolvent / bankrupt
- Has their license suspected by NSW Fair Trading
So as you can see, for most people these events won’t really be applicable to them.
In my discussions with other Builders, most feel that all HBCF really serves to do is to bail out the incredibly dodgy Builders and extreme cases.
However since it is a legal requirement for projects under 4-storeys to have in place, it is an expense that you must factor when constructing.
Unlike comprehensive car insurances which will cover you for all repairs (provided you pay for the excess fee and premium), HBCF will not cover all expenses.
As of writing this, HBCF only provides a maximum cover per dwelling of:
- $300,000, if issued before 1 February 2012
- $340,000 for all other policies.
So in the event that your project costs more than the above amount, you will need to come up with the funds yourself.
How is HBCF Calculated?
Similar to comprehensive car insurance, the cost for HBCF will vary dependent on the ‘type’ of project and the construction cost.
HBCF is usually calculated based on a percentage of the construction cost. However for different project types (such as home, duplex, townhouse) the percentages vary.
There is also either a discount or loading applied based on which Builder you select for the project.
A new single dwelling project (C01) of the contract value of $2,000,000 equates to:
Stamp Duty (9% on Base + GST):$1,881.00
A new duplex (2 dwellings) project (C02) of the contract value of $2,000,000 equates to:
Stamp Duty (9% on Base + GST):$1,881.00
A new multi-dwelling (4 dwellings) project (C03) of the contract value of $2,000,000 equates to:
Stamp Duty (9% on Base + GST):$5,662.80
(TOTAL for each dwelling)$17,145.70
Note: This is based on the assumption of there being 0% discount and loading for both examples.
So as you can see, the cost for HBCF varies between single dwellings and multi-dwellings.
In the instance of example 3, whilst each dwelling is paying less for the HBCF cover the total cost for HBCF ends up costing over triple the amount when compared with a single-dwelling project which has the same construction cost.
Another thing to keep in mind is that at the end of every construction project, the Builder must notify icare of the ‘actual’ cost for the project.
For instance, if the Builder had quoted $2-million dollars for a single dwelling project and it ended up costing $2.5-million dollars, the Builder will need to inform icare of the actual cost for the project and pay the additional cost.