CONTRACTUAL TERMS FOR MAJOR DOMESTIC BUILDING WORK

Building contacts are complex and can contain onerous provisions on builders when the contact is priced over $5,000. This fact sheet provides an overview of building contracts for domestic purposes and highlights some key points. Always remember to seek legal advice before signing any building contracts.

Foundations Data

The construction of foundations, footings and slabs can sometimes involve additional work, resulting in significant increases to the contract price.

To protect the consumers against these uncertainties, the Domestic Building Contracts Act 1995 (Vic) ("DBCA") requires a builder to thoroughly investigate the site prior to preparing footings or foundation design.

S 30 of DBCA requires a builder to obtain all reports, surveys and test results necessary for the preparation of a proper footings design and an adequate estimate of the cost of constructing those footings.
Work is normally done before entering into the contract and the consumer pays the cost of this investigation.

A builder cannot require a consumer to pay additional money in respect to footings work if this additional amount could have been reasonably ascertained had the builder obtained all necessary foundations data.

Some builders allow contingency sums in the contract to cover any additional foundation work. Consumers should attempt to minimise these contingency sums. In respect to foundation work, consumers should require the builder:

to comply with DBCA;
to undertake necessary investigative work; and
to prepare and cost a proper footings design

Important Contractual Provisions

S 31 of DBCA sets out in some details what must be included in this type of contract:

must be in writing;
provide a detailed description of the work;
include plans and specifications;
state the names and addresses of the parties;
state the registration number of the builder;
provide a start date or how that date is to be determined and, if the start date is not known, require the builder to do everything that is reasonably possible to ensure the work will start as soon as possible;
state the date when the work will finish or a number of days that will be required to finish the work once it is started; and
state a contract price.

Cooling Off Period

A consumer may withdraw from such contract at any time before the expiration of five clear business days after they receive a copy of the signed contract.

How?

Contracts are required to contain a written notice advising consumers of the cooling off period. If a consumer wishes to 'cool off', simply complete the notice and serve it on the builder.

If a consumer withdraws from the contract

The builder may retain (out of any money already paid) $100 plus any other out of pocket expenses. The builder must refund all other money.

Variations

A. Variation to contract price

1. Variations at the request of the builder

Formal requirement:
builder must give a written notice of the variation, state why the variation is necessary and state the time it will take to complete the works; and
builder must also provide a cost of the variation and state the effect it will have on the contract price.
Unless a building surveyor requires a variation, a builder cannot carry out any variation without the consumer's signed consent.
Circumstances in which a builder can request additional money for variations is very limited:
S 37 of the DBCA provides a builder is not entitled to recover any money in respect to a variation unless the builder can establish that the variation is both necessary and could not have been reasonably foreseen at the time the contract was entered into.

2. Variations at the request of the consumer.

Consumers must provide written notice to the builder.
In minor situations (less than 2% of the contract sum) the builder may carry out the variations.
In all other situations:
The builder must give the consumer a notice stating:
whether the variation will require variation to the building permit;
whether it will result in any delays and an estimate of those delays; and
an estimate of the cost of variation and its effect on the contract price.
A builder cannot proceed with a variation unless the consumer accepts the builder's notice by signing and returning it to the builder.

B. Delays and extensions to completion time

Generally major domestic building contracts:

must specify a date when the work will be finished, or the number of days that will be required to finish the work; and
allow the builder to claim for extensions to the finish date when delays occurred.

Extensions of time:

normally permited in certain circumstances that are beyond the builder’s control (eg. inclement weather, certain industrial disputes, delays by consumers, variations to the plans requested by the consumer, etc).
S 32 of the DBCA requires a builder to make allowances in the contract for inclement weather, public holidays, weekends, rostered days off and any other delays.

Most building contracts provide for liquidated damage in the event of delay.

Liquidated damages are an estimate of the daily or weekly costs to the consumer of any delays to the completion of work.
Normally such damages are deducted from progress payments payable to the builder.

Progress payments

Building contracts normally provide for payments to be made to the builder at various stages of the work.

S 41 of DBCA regulates the amount that can be claimed by the builder on completion of each stage of the building.

In a contract to build all stages of a home, a builder cannot claim more than the following:

Deposit 5%;
Base stage 10%;
Frame stage 35%; and
Fixing stage 25%.

Progress payment should be paid within time allowed by the contract. Failure to do so:

may attract penalty interest; and
is a breach of the contract by the consumer.

Before any payment is made, ensure that the builder completes the stage and that they are entitled to the payment.

Home warranty insurance

Only required if the contract price is more than $12,000.
The insurance typically covers:
defective building work (including breach of implied warranties);
non-completion of work;
loss of deposit or progress payment;
alternative accommodation; and
breaches by the builder of the Trade Practices Act 1974 (Cth) and Fair Trading Act 1999 (Vic).

Some limitations:

Cover is only available if the builder is dead, insolvent or has disappeared.
Cover for completion costs is capped at 30% of the contract price
Legal costs and expenses are included in the sum insured. Thus while the minimum sum insured in $200,000, there is real danger that cover will be eroded by legal costs.
The consumer must make a claim within 180 days of the date when the consumer first became aware, or might reasonably be expected to become aware of the circumstances giving rise to the claim.
The insurer must make decisions within 90 days.

Other insurance

Consumers should insist that their builder is covered by contract works and public liability insurance.

The insurance normally covers:

damage to the works (e.g. by fire, etc);
liability to others such as neighbours arising during the work; and
injury to others arising from the works.

Completion

As the work draws to a conclusion, it is important for consumers to ascertain when the works are actually concluded by the builder.

In some contracts, the finish date is described as 'practical completion': the stage when works have been substantially completed except for minor defects.
In other contracts, the completion of works is determined by the building surveyor issuing an occupancy permit or certificate of final inspection.
Most contracts provide that the works are deemed complete when the consumer assumes occupation of the home.

Payment

S 42 of DBCA provides that a builder must not demand final payment until:

the work has been completed in accordance with the plans and specifications; and
the consumer receives an occupancy permit or a certificate of final completion is issued by the building surveyor.

The consumer should keep a careful record of all claims, documentation and correspondence generated by the building project.

Defects liability period

Most contracts provide a period (usually 13 weeks from the completion of the work) during which the consumer can require the builder to return and repair defects.

NB: not all contracts contain such a provision

Tips:

Once you assume occupation of your new home, you should list all defects and provide these lists to the builder in accordance with defects liability period provisions in the contract.

For more information on this subject refer to The Law Handbook chapter 14.2