HOME BUILDING CONTRACTS - CHECKLIST
Title Do the owners own the land? Annex proof of ownership (eg copy of Certificate of Title) to the contract. This and proof of the availability of funds are sometimes required (eg clause 4(a) of the BC4) before the builder is required to commence building and failure to provide them may be a breach.
Zoning Is the land zoned residential? Are there any easements, rights of way, stock routes or RTA affectations?
Site Problems The owners should check for reactive soil, fill, landslip potential, rocky outcrops requiring removal, watercourses and springs that might affect building works and for features such as cliffs or gullies that will affect access for builders or occupants. To prevent the builder claiming extra costs for unusual site conditions which an ordinary site inspection should have revealed to him insert a term to the effect that the builder is deemed to have visited the site before contracting and to have made himself aware of all site conditions perceivable by visual inspection.
All Weather Access to Land Some contracts require the owners to provide the builder with all weather access to the land. If the builder has to provide this access it will be at the owners' expense and will be an additional charge. In the case of some sites this could be very costly. I recommend the insertion of a statement that the builder is deemed to have visited the site before contracting and warrants that all weather access of the type referred to will cost a specified amount (default amount $0.00).
Availability of Services Are water, gas, electricity or sewage available to the site? Does the house have to be constructed to a certain level to enable gravity discharge to the sewer? Will the owners have to pay for head works for the supply of any of these services?
Development Approvals What are the council's usual requirements? Can the owners afford to meet them?
The Building Approval Annex the building approval to the contract and consider whether its terms require any additional construction not included in the builder's quotation. Get the builder to amend the quotation and specifically include the additional work and give a cost for it.
The Approved Plans The owners should ensure that the plans which are the basis of the quotation and the contract are the approved plans and that they are identified as part of the contract.
Funding Have the owners got the funds to pay for the works or have they the funds guaranteed? Annex proof that they have the funds (eg copy of Bank letter) to the contract. This and proof of title are often required before the builder is required to commence building and failure to provide them may be a breach.
The Quotation Should Cover the Whole Project The owners should ensure that the quotation does not expressly exclude any part of the works. Is all the work to be done clearly set out in the Plans and Specifications? If not ensure that the additional matters are referred to in the quotation and that the quotation is annexed to the contract.
Omissions from Quotation Sometimes the builder omits to include necessary works in his quotation and then seeks to claim for them as extras. Insert a condition to the following effect:-"Except where an express exclusion has been made herein, the Contract Price includes all matters that could be reasonably necessary for the completion of the works covered by the agreement and the plans."
Builder's Licence Go to the Department at Fair Trading website to check that the builder's licence matches the name on the contract, entitles it to do the building work contemplated, and is current, how long it has been licensed, whether there has been any disciplinary action taken against it and whether there are any current complaints against it being investigated by the Department.
Exhibition Homes The owners should, if possible, examine an exhibition home or other example of the work of the builder prior to deciding to engage him. If they find it satisfactory and engage the builder on the strength of it they will naturally expect a home of a matching standard. I suggest an additional term giving the address of the exhibition home and stating that the building works must be completed to the same standard as the builder’s exhibition home at…(address).
Plans and Specifications to be Provided by the Builder If the builder is providing the plans and specifications, the contract should provide that the builder warrants that the plans and specifications are accurate and correct in every way and not in breach of copyright and that any delay arising from inaccuracy or incorrectness in the plans and specifications or from a breach of copyright will not entitle the builder to an extension of time or an additional payment and that any variations so arising will be at the builder's cost.
The Nature of Specifications The specifications in an ordinary home building contract should just set out the standards to which the building work should be performed. The standard printed Specifications appropriate to the particular contract form should be the ones annexed. Oppose the inclusion of the builder's "home made" specifications which are frequently inadequate and sometimes contain unacceptable contractual terms and may in any event not be acceptable to lending institutions.
Variations Avoid variations. The charge for variations is generally cost plus a profit percentage (which in the usual case should not exceed 20%). Variations are very costly. Prospective owners should discuss and go over the plans very carefully many times before contracting to avoid the need for any variations.
Provisional Sums and Prime Cost Items Are Provisional and PC sums clearly set out? Are they warranted to be reasonable estimates based on current costs? I suggest a term to the following effect: "Where the provisional sums are included in the Contract Price the Contractor warrants that those sums are reasonable estimates based on costs current at the time of contracting".
Profit Margin Is the builder's profit margin on provisional items reasonable? (ie between 10% and 20% of the cost)
Deposit Is the deposit within the legal limit? (The Home Building Act to sets limits on the amount of deposit that can be required under the contract of not more than 10% if the contract price is under $20,000.00 or, if over that sum, then not more than 5%.)
The Commencement Date and the Completion Date Are they clearly set out?
Progress Payments should reflect the value of work done to the date of the claim. Insert a clause stating: “The Contractor warrants that the Progress Payments set out herein equate to the value of the work done at that stage of the Building Works." and "Payment of a Progress Payment by the Owner is not an admission that the work subject of the Progress Claim has been completed satisfactorily or in accordance with the contract documents."
Failure to Pay Progress Payments sometimes an owner wishes to have that power to withhold a progress payment. This problem might be dealt with by a clause stating that notwithstanding anything else stated in the agreement, failure to pay progress payments shall not constitute a breach of contract nor shall it entitle the builder to determine the contract where within the time for making such a payment the owner deposits the disputed sum into an interest bearing account in the joint names of himself and the builder and from which money cannot be withdrawn without the consent of both parties and then gives the builder notice in writing of his reasons for doing so. This however can seriously affect the ability of the builder to complete the works since often the amount of money invested in the work the subject of the progress claim is the greater part of his working capital. This is a most dangerous course for an owner to adopt.
Variation Procedure Does the prospective owner understand the procedure for variations (in writing and costed before being done) and is the margin for variations reasonable? (between 15% to 20% of cost?).
Extension of Time Procedure Do the owners understand the procedure for extension of time?
Caveat Provision Almost all the standard contracts place a charge on the land in favour of the builder. What this means is that if a dispute arises the builder can lodge a caveat to prevent the owner from selling any part of the land. This could be disastrous for the owner if, for example, he was relying on the sale of the land or part of it to fund the building project. I recommend however that the contract should also provide that the contractor shall not be entitled to lodge or maintain a caveat on the land if a sum equal to the amount claimed by the Contractor has been deposited by the Owner in a bank account from which the money may not be withdrawn without the signature of both parties.
Liquidated damages There should be a liquidated damages clause providing that the owner may deduct his or her pre estimated losses from the contract sum when the builder exceeds the construction time set out in the contract. Base the rate of liquidated damages on the rent they will be paying while kept out of their house or the interest they will be paying on their building finance. If they are not renting or paying interest, then apply the short term money market rate to the monies they will invest in the project. Remember, liquidated damages need only be a rough approximation.
Practical Completion Building work, as a general rule, is said to have reached to stage of "Practical Completion" when the work is complete except for minor defects. Unless the contract contemplates that other works are to be performed by the owners, it usually means that the premises are also fit for occupation and use. When this stage is reached the builder serves a Notice of Practical Completion. In some contracts, at that stage, the final payment of the balance of the contract sum must be made by the owner. The owner, on receipt of that notice, must then list the items still incomplete or defective and give that list to the builder, who is supposed to carry out and complete those items with a reasonable time thereafter. The problem is however that over eager builders have issued premature notices and demanded immediate payment of the balance of the contract sum. Once they have received the balance of contract sum, it sometimes becomes very difficult to get them to come back to complete the "minor" defects and omissions. My recommendation is that those contracts be amended to provide that final payment is to be made when those "minor" defects and omissions have been rectified. In the past, also, some builders have also to served Notices of Practical Completion before the site has been cleared of building material and rubbish. I recommend an additional term providing that a Notice of Practical Completion cannot be validly served under the agreement until all rubbish and surplus material has been removed from the site.
Rise and fall clauses for materials and labour. Recently unexpected rises in the costs of building materials such as steel and timber have caused a blowout in costs for builders who have not had rise and fall provision in their contracts to adjust the contract price to cover those rises in costs. This has ruined many builders and caused loss both to themselves and the clients whose work was left incomplete as a result. The solution for both parties is a rise and fall clause which can cover just materials, just labour or both materials and labour. Our preference would be for the latter. This does expose an owner to the full brunt of cost increases, but it reduces the chance of the builder going out of business which is even more damaging.
Beware clauses which allow increases of the contract price if the Local Government approval has not been achieved by a certain date. These clauses are especially offensive where the builder has taken over the task of obtaining the Local Government approvals as it can , by dilatory conduct, obtain an advantage in terms of a price increase which may be other wise not justified. The clauses are justified by the risk it is said, of rises in the costs of labour and materials. The answer is to insert a well drafted rise and fall clause which deals with such risks fairly.
For a set of Special Conditions to provide for the above issues you are welcome to access our web site at: https://www.petermerity.com.au/ and download a copy of the Special Conditions applicable to each of the Standard Form Home Building Contracts.