Building a home can be the realisation of a long held dream or may involve the construction of an investment property.
Whether you intend to live in the constructed house or alternatively wish to use it as an investment property, building a home is a significant expenditure which warrants taking care to ensure that the building contract is not one sided and contains a fair allocation of risk between the parties.
Standard form contracts are typically used in the construction industry and consumers should be aware that the standard form contracts drafted by construction industry associations such as Master Builders Australia ("MBA") and the Housing Industry Association ("HIA") are heavily weighted in favour of the builder.
Before signing a building contract you should consider seeking legal advice.
Some Issues To Consider
- Fair Contract? The MBA and HIA standard form contracts contain many provisions which require amendment to ensure a more balanced risk allocation between both the builder and the consumer. Adequate Special Conditions should be negotiated with the builder to bring balance to the contract.
- "Lump Sum" or "Costs Plus" contract? What type of contract is proposed – "Lump Sum" contract or a "Costs Plus" contract? "Lump Sum" contracts provide greater certainty on the cost of construction works and are preferable to "Costs Plus" contracts which can have significant costs blow outs without tight administration and budget controls.
- Fixed Costs or Provisional Allowances? What proportion of costs are fixed and which costs are provisional allowances (estimates)? Are items subject to provisional items matters which genuinely can't be definitively priced by the builder such as concrete piering or excavation as opposed to items which should be accurately priced such as tiles or brickwork?
- Adequate Site Investigations? Appropriate site investigations should be undertaken by the builder to determine the reactivity of the soil (essential for ensuring the durability of the building's foundations and slab) and identify any soil contamination or rock which requires removal (to avoid later unexpected price variations for matters which could be identified from preliminary site investigations). The contract should contain appropriate warranties in relation to such site investigations.
- Licensed Contractor & HOW Insurance Eligibility? A valid contractors licence number must be identified in the contract. Is the builder eligible for home owners warranty insurance, where required for jobs over $20,000?
- The money paid to the builder under the contract prior to construction work commencing must not exceed 10%.
- Time, Liquidated Damages and Delay Damages. Does the contract clearly set out a commencement date and a completion date? If the project is delivered late then does the contract make adequate provision for the payment of liquidated damages to the owner, i.e. a genuine pre-estimate of the owner's damages such as loss or rent, storage expenses, and increased financing costs. The timing of when liquidated damages can be applied by the owner is vital to ensure that the liquidated damages clause is effective. Consideration should be given to whether provisions for when a builder may claim delay damages where a project is delayed by an owner's actions are fair?
- Extension of Time To Complete The Works. Do you understand the circumstances in which the builder is entitled to an extension of time to complete the project and are the nature of circumstances in which an extension of time is granted and the mechanism for extending the time to complete works under the contract fair.
- If finance is required what provision is there in the contract to make it subject to finance and do you understand what occurs if finance is not obtained?
- Payment Terms. For those projects where the consumer intends to live in the house and milestone payments are to be made throughout the project, the contract must contain a payment schedule that provides for each progress payment to be made at the completion of specified stages. Otherwise, the contract may provide for payments to be made at fixed intervals, or on an as invoiced basis, for labour and materials (plus margin) upon production of invoices, receipts and any other reasonably necessary documentation.
- Front Loaded Contracts. These aren't contracts for the purchase of excavation machinery, but rather contracts where the sums demanded for progress payments aren't weighted to the equivalent value of the works performed. Under such contracts an owner may be left paying a small final payment in proportion to the work left to be performed in that final stage. There can be a disincentive to a builder finishing off the job in such circumstances and an even larger problem if a contract is too front loaded and the builder becomes insolvent leaving incomplete works. In such circumstances there may be a shortfall between the home owners warranty insurance an any increased cost in the stalled project being completed by a new builder.
- Do you understand the circumstances in which a contract may be varied and are the mechanisms for varying the contract fair?
- Plans, Specifications and Display Home. If the house to be constructed is based upon a display home, it must be made clear in the contract that the house to be constructed is the same model as the display home and that it is to be constructed to the same standards of workmanship and quality of materials.
- Practical Completion. Do you understand the process for achieving practical completion? Practical completion is usually when the works are complete except for minor defects and omissions which do not prevent the works being used for the purpose in which they are intended. Does the practical completion process allow for identification of defects and omissions, timing for those defects and omissions to be rectified, a clean site at handover and installation of all appliances at handover? Certain contracts can provide that an owner is responsible for obtaining a Final Occupation Certificate from the certifier. This may be practical when an owner is responsible for works from practical completion such as landscaping and driveway construction, however, for "turn key" projects the builder should obtain the Final Occupation Certificate.
- It is critical that where a contract is terminated it is terminated in the precise manner as provided for in the contract, to avoid a damages claim for wrongful termination. Do you understand the process for termination, is it not too one sided and does it adequately protect you for those circumstances in which you may need to terminate the contract?
- Legislative Provisions. The Home Building Act 1989 provides for certain mandatory clauses to be included in contracts, for certain information to be provided in contracts and for certain documents to be annexed to contracts. If the builder doesn't comply with the Home Building Act 1989 she/he can be penalised under the Home Building Act 1989 and non-compliance can effect the ability of the builder to enforce the contract. It can sound a warning if a builder presents a contract which contains numerous breaches of the Home Building Act 1989 and caution should be exercised by you in proceeding in such circumstances.
Whether this is your first construction project or one in a long line of previous construction projects, care should be taken to ensure that you have received legal advice on the terms of the contract proposed by the builder.
We can assist with providing advice to you in relation to the proposed construction contract for your project and negotiating any amendments to that proposed construction contract with the builder.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.