Defective work claims are a common reason why Mellor Olsson is engaged by individuals and businesses that are involved in the construction industry. Defective work claims may arise during the course of a project or at the end when completion is reached. If a builder or subcontractor responds to a defective work claim by asserting that their work meets the required standard, it can cause delays and further complications for the principal.
Risk management is critical to avoid the potentially devastating consequences of a dispute. It is important to, where possible, negotiate favourable terms to your contract. This can include engaging a solicitor at the outset to review draft contracts. The complexity of contracts proposed by owners to head contractors and head contractors to subcontractors is increasing. Often a dispute resolution clause is included within the contract and with the right advice, if the contract provides a mechanism for dispute resolution, then we encourage the parties to participate in those processes, which might include conciliation or mediation. These provisions often provide for more cost-effective dispute resolution and assist when the parties remain engaged with one another.
Even a carefully drafted contract cannot insure against the tough prevailing economic conditions that the construction industry is facing. Since the COVID-19 pandemic, builders have experienced year-on-year price rises and, together materials being in short supply, the impact for some builders has been too much. In the residential home building industry, the Building Work Contractors Act 1995 (SA) and the associated regulations include specific consumer protections to limit a homeowner's exposure to the impacts of substandard workmanship. These protections include:
1. A limit on the amount that a builder can demand as a deposit in advance of doing the work;
2. A prohibition on a builder demanding payment unless it is a genuine progress payment in respect of work already performed; and
3. A requirement for a builder undertaking residential construction work where the contract price exceeds $12,000 and development approval is required, to hold a policy of building indemnity insurance for that work.
These protections assist consumers by reducing the risk of being left out-of-pocket for incomplete work if, for example, the builder becomes insolvent, cannot be located, or if an individual passes away. The recent collapse of Xtraordinary Constructions continues to highlight the volatility and challenges that builders are facing, which sometimes cannot be overcome. Xtraordinary Constructions replaced Qattro Built on a number of development projects that were incomplete when it collapsed. The need for building indemnity insurance is particularly important in the current climate where, if a builder collapses, the cost to the homeowner to engage another builder to complete the home or repair defective work is likely to be much higher than what it would have been at the time that the original contract was entered into.
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