Magico ConstructionsWhat is HBCF? Home Building Compensation Fund Explained
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 the 15th of January 2015, it was known more commonly as ‘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, and Suncorp, just to name a few. (List of past providers can be found here)
However, on the 1st of January 2018, the NSW Home Building Compensation Scheme took into effect. 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 to 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
- Dies
- ‘Disappears’
- 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 in when constructing.
Unlike comprehensive car insurance 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 the project and the construction cost.
HBCF is usually calculated based on a percentage of the construction cost. However, for different project types (such as homes, duplexes, townhouses) the percentages vary.
There is also either a discount or loading applied based on which Builder you select for the project.
Example 1:
A new single dwelling project (C01) of the contract value of $2,000,000 equates to:
Base premium:$19,000.00
GST:$1,900.00
Stamp Duty (9% on Base + GST):$1,881.00
TOTAL:$22,781.00
Example 2:
A new duplex (2 dwellings) project (C02) of the contract value of $2,000,000 equates to:
Base premium:$19,000.00
GST:$1,900.00
Stamp Duty (9% on Base + GST):$1,881.00
TOTAL:$22,781.00
Example 3:
A new multi-dwelling (4 dwellings) project (C03) of a contract value of $2,000,000 equates to:
Base premium:$57,200.00
GST:$5,720.00
Stamp Duty (9% on Base + GST):$5,662.80
TOTAL:$68,582.80
(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 covers the total cost of the HBCF. It 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 of the project and pay the additional cost.
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