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Building contracts

Building contracts normally comprise three separate documents:

  1. The first is the building contract itself. This is a legal document, usually in standard form. It sets out the role, rights and responsibilities of the consumer and the builder. A number of standard form contracts are available. If you are unsure about which one is appropriate for your project, you should consult your lawyer.
  2. The second document is the specification. This is a listing of the work to be carried out, the items to be supplied and installed by the builder and the manner in which certain work is to be undertaken. It is a technical document and you should consult the builder or an architect if you are unsure about its contents.
  3. The third document is the drawings or plans. These are prepared by either your or the builder’s draftsperson or architect. Review them carefully to ensure that they detail the work in accordance with your intentions. Ensure they have been approved by the building surveyor and bear their stamp of approval.

To avoid any later confusion, at contract signing time, request at least two copies of all contract documents and ensure you and the builder sign each page of each document.

Contractual terms - all contracts

The DBCA contains provisions that apply to all contracts for domestic building work. It contains more onerous provisions that apply to contracts for major domestic building work, being contracts for domestic building work with a value of more than $5,000. This section deals with the provisions that apply to all domestic building contracts.

Implied warranties

Section 8 of the DBCA implies in all contracts for domestic building work the following warranties:

  • the builder will carry out the work in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;
  • the materials to be supplied by the builder will be good and suitable for the purpose for which they are used and, unless otherwise stated, those materials will be new;
  • the work will be carried out in accordance with, and will comply with, all laws and legal requirements;
  • the work will be carried out with reasonable care and skill and will be completed by the date specified by the contract;
  • the work will be suitable for occupation; and
  • if the contract states a particular purpose for the work, the work and the materials used will be reasonably fit for the purpose.

These warranties are covered by home warranty insurance (discussed below), which is supplied by the builder for works in excess of $12,000. Importantly, these warranties run with the land and can be called upon by subsequent purchasers of the home. Purchasers of residential properties have the benefit of these warranties for a period of 10 years, commencing from the date of the occupancy permit.

For further information about contracts and warranties, see Chapter 12.2: Implied Conditions and Warranties.

Deposit

A builder must not demand or receive a deposit of more than:

  • 5% of any contract where the contract price is $20,000 or more; or
  • 10% of any contract price that is less than $20,000.
Cost-escalation clauses

Section 15 of the DBCA places restrictions on cost-escalation clauses. Such clauses are quite common in building contracts and provide for an increase of the contract price in certain circumstances, such as variations in the building works, and delays caused by the owner. A cost-escalation clause in a domestic building contract is void unless the contract contains a notice in the prescribed form alerting the consumer to the effect of the clause and the consumer places their signature or initials next to each such clause in the contract.

If during construction, a builder asks for more money than has been allowed in the contract price, review the contract carefully before agreeing to payment. For example, a builder cannot demand more money because of wage increases or inflation. Check all builder demands against the cost-escalation clauses that you signed or initialled at the time you signed the contract.

Builder’s caveats

Prior to the DBCA it was common practice for builders to place a caveat on the owner’s property. The caveat provided the builder with some security and leverage in respect to payment of the contract price. Section 18 of the DBCA has abolished this practice. It provides that a domestic building contract does not entitle a builder to place a caveat on the owner’s property title.

Some builders have sought to overcome this provision by requiring owners to sign a side agreement which, strictly speaking, is not a domestic building contract and therefore falls outside the prohibition under the DBCA. Consumers should avoid signing any such side agreements.

Provisional sum and prime cost items

Consumers should always try to ensure that every item of work and material is properly priced and that price is fixed in the contract. However, this is not always possible. Some items to be included in the work are not agreed prior to the signing of the contract, for example, tile selection, white goods, or tapware may be decided after a building work is commenced. In respect to these items, the builder normally estimates and includes in the contract a prime cost item.

Similarly, certain works may not be agreed prior to the contract (e.g. fencing, landscaping and painting) and for these works a builder will normally estimate and include in the building contract a provisional sum.

Most contracts allow the builder to charge a substantial loading if the consumer spends more than the agreed estimate for a prime cost item or provisional sum. Section 21 of the DBCA requires a builder to provide a reasonable estimate for provisional sums and prime cost items. Further, before entering into the building contract a consumer must receive a list containing a detailed description of each item of work, a breakdown of the cost estimate for each item or sum and how the builder proposes to charge for any excess amount.

The estimate for prime cost items and provisional sums is included in your fixed contract price. Try to avoid including prime cost items and provisional sums in your contract. If they are necessary, ensure that a reasonable allowance is made. Clarify in writing whether the allowance includes or excludes GST.

Builders are required to provide consumers with copies of any invoices, receipts or other documents that show the cost to the builder of any prime cost item or provisional sum.

Other matters

The builder is required to provide to the consumer a legible copy of the contract. The builder is also required to provide a copy of any notice, order or other document that the builder receives in relation to the building work from any public statutory authority.

Be careful about goods and services tax (GST). Does the contract price include or exclude GST? Do the provisional sums and prime cost items include or exclude GST? If you are unsure about GST, consult your accountant. Avoid verbal agreements or assurances about GST, or about other contract matters; make sure everything is in writing.

Contractual terms - major domestic building work

The DBCA places more onerous provisions on builders in contracts for major domestic building work (i.e. where the contract price is more than $5,000). These provisions are discussed in this section.

Given the requirements of the DBCA, only certain building contracts are suitable for domestic building work. The Master Builders Association and the Housing Industry Association market their own contracts, which are often used by builders who are members of those associations. The Royal Australian Institute of Architects, in conjunction with the Master Builders Association, has produced the ABIC suite of contracts, which have been adapted for domestic building work. Any other form of contract offered by a builder should be reviewed carefully.

It is important that consumers obtain legal advice before signing any building contract.

Foundations data

The construction of footings and slabs can sometimes involve additional work, resulting in significant increases to the contract price. To protect consumers against these uncertainties the DBCA requires a builder to thoroughly investigate the site prior to preparing a footings or foundation design.

Section 30 of the 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. The DBCA sets out in some detail the matters a builder must take into account in preparing a footings design. The builder’s responsibility for obtaining adequate foundations data is not altered if the builder receives soil information about the site from the consumer. If the builder believes this information is not adequate, they must make their own inquiries.

This work is normally carried out before a contract is entered into and the cost of this investigation is paid by the consumer.

Some builders require owners to enter a preliminary agreement covering such items as foundations data, surveying the site, a structural engineer’s report and design and preparing preliminary designs and drawings. As the value of this work may not exceed $5,000, these agreements are not major domestic building contracts. They are still important agreements. Owners should ensure that the preliminary agreement does not require them to assign or transfer intellectual property or copyright in any design work to the builder. Unless the owner retains copyright in the work, they may not be permitted to give the design to another builder to construct.

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

Some builders allow contingency sums in the contract to cover any additional foundation work. Consumers should attempt to minimise these contingency sums and, in respect to foundation work, should require the builder to comply with the DBCA and to undertake the necessary investigative work and prepare and cost a proper footings design.

Important contractual provisions

The DBCA sets out in some detail what must be included in a contract for major domestic building works. Section 31 of the DBCA requires that the contract, among other things, 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 a 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 a major domestic building contract at any time before the expiration of five clear business days after they receive a copy of the signed contract. Contracts are required to contain a written notice advising consumers of the cooling-off period. If a consumer wishes to “cool-off” they simply complete the notice and serve it on the builder in accordance with the contract provisions.

A consumer cannot “cool-off” if they have previously entered into a similar contract for the same work or have received legal advice before entering into the contract.

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

Two major concerns in any building contract are variations to the contract price and extensions to the completion date.

Variation to contract price

Variations to the contract price may arise at the request of either the consumer or the builder. Changing your mind about the works after the contract has been signed can be a very expensive exercise.

Should a builder request to vary the plans or specifications, the builder must give the consumer written notice of the variation, state why the variation is necessary and state the time it will take to complete the works. The 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 signed written consent of the consumer.

The DBCA and most building contracts limit the circumstances in which a builder can request additional money for variations. Consumers should familiarise themselves with the relevant contract provisions before agreeing to pay any additional money. Section 37 of the DBCA provides that 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.

If a consumer wishes to vary the works they must provide a written notice to the builder requesting a variation. If the variation is of a very minor nature (i.e. it will not add more than 2% to the contract sum), the builder may carry out the variation However, be careful, as in large projects 2% may amount to significant additional expenditure.

In all other circumstances the builder must give the consumer a notice stating whether the variation will require a 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 requested by the consumer unless the consumer accepts the builder’s notice by signing and returning it to the builder.

Delays and extensions of time

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. Most contracts allow builders to claim an extension to the finish date when their work is delayed. A lazy or disorganised builder who has fallen behind schedule may deliver a number of claims for extensions of time towards the end of the project.

Consumers should carefully read the provisions in their contract dealing with delays and extensions of time. Normally building contracts only permit extensions of time in certain circumstances that are beyond the builder’s control; for example, inclement weather, certain industrial disputes, delays by the consumer, and variations to the plans requested by the consumer. Consumers should carefully scrutinise a builder’s claims for extensions of time to ensure they are allowed by the contract.

Section 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. These allowances must be exhausted by the builder before the builder is entitled to an extension to the completion date under the contract.

Each day onsite involves the builder in some costs, for example, the hire of equipment and labour. Delays caused by the consumer will normally attract a claim for additional money arising from the extended period that a builder is required to be onsite to complete the work. So a consumer should be careful to avoid delaying the builder’s work.

Consumers are advised to keep a written record of the daily progress of the project. Note who is on site, what work is undertaken and the weather conditions; also take regular photos of the state of the work. Always monitor the finish date, as adjusted from time to time.

Liquidated damages

Most building contracts provide for liquidated damages if building work is not completed by the finish date. Liquidated damages are an estimate of the daily or weekly costs to the consumer of any delays to the completion of the work. These damages are normally calculated with reference to rental and finance costs. A builder is liable to pay liquidated damages if they are late in completing the work and such damages are normally deducted from the progress payments that are payable to the builder (see below).

You should ensure that the contract allowance for liquidated damages is sufficient to cover all costs you will incur if the project is delayed.

Talk regularly with the builder about the progress of the works and discuss any concerns you have as soon as they arise.

Progress payments

Building contracts normally provide for payments to be made to the builder at various stages of the work. Section 40 of the DBCA regulates the amount that can be claimed by the builder on completion of each stage of the building works. 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: 15%;
  • lock-up stage: 35%; and
  • fixing stage: 25%.

Ensure you are familiar with the progress payment provisions in your contract. Ensure your cash flow is adequate. Check to see that the stage is completed by the builder and that they are entitled to payment. A registered building inspector can assist you with this important task.

Definitions of work stages and an explanation of how the restrictions operate can be found in section 40 of the DBCA. These restrictions will not necessarily apply if the contract is being administered by an architect and contains an appropriate disclosure to the consumer that the limitations under section 40 do not apply.

Progress payments should be paid within the time allowed by the contract. Failure to pay the builder on time may attract penalty interest. It is also a breach of the contract by the consumer.

Be careful not to commit to a large upfront payment to the builder. Such payments are fraught with risks should the builder later encounter financial difficulties. It may mean that there is not enough money left in the contract to complete the work. If the builder becomes insolvent, such payments may not be recovered, as home warranty insurance limits the amount of payments that are recoverable from an insolvent builder.

Building contracts :: Last updated: Sun Jun 30th 2013