Top 10 Things That Homeowners Ought to Consider When Entering into a Domestic Building Construction
If you’re looking to enter a domestic building contract for the construction of a new home or for renovations to your existing home, there are many things you’ll need to think about, from the flooring to your paint choices. In addition to all your aesthetic choices, there are plenty of things you specifically need to consider when it comes to your contract itself, as this will be the backbone of the entire construction project.
1. Initial Period
After you sign a building contract, you will generally have a period where you are required to provide the builder with information including proof of ownership, proof of loan approval and relevant building approvals.
If you need to obtain finance approval prior to being able to commit to the project, make sure the contract documents accurately reflect this to avoid a scenario where you are contractually bound to proceed with the contract, regardless of finance approval. Also make sure you clarify up-front who is responsible to obtain building approval, as often builders advise they will ‘assist’ but the ultimate responsible may lay with the homeowner, which is not ideal.
2. Progress Payments
Progress payments are payments made to the builder at certain stages of the construction process, which should be clearly set out and identified in your contract. It is important to ensure you are aware of what is payable and at what time and that your contract does not impose any restrictions on progress payments. It is arguably more important that you make sure the work you are paying for has been carried out, in the manner required by the contract.
3. Pricing
Your building contract may be a ‘fixed price’ or ‘cost-plus’ building contract. A fixed price contract is one where the total price is fixed, barring any variations, delays, or extenuating circumstances. The other form of building contract is ‘cost-plus’ where you may be given an estimated final price, but the contractor will obtain the materials and services through the building process and pass the costs onto you, as well as charge their own time by the hour. This can become costly quite quickly, so it is always our recommendation that a fixed price contract be entered into, to minimise the risks of ‘blow outs’ to homeowners.
4. Variations
When negotiating the construction contract, it is very important that the contract contains a clause that variations only be allowed where it is agreed to in writing by both parties, prior to the work the subject of the variation being carried out.
What can often happen is a simple site conversation where the homeowner innocently changes a product or selection, thinking it will be the same cost, can end up resulting in a very costly exercise for the homeowner. Where builders know that variations have to be subject to writing, they will make decisions more carefully and explain them to homeowners in more depth, as ultimately the risk in those circumstances lies with the builders.
5. Defects Liability Period
The defects liability period is the period where the builder is required to return to repair any defects. This will usually start at the date of practical completion. It is important to check your contract to determine the length of any defect liability period before you enter your contract to ensure that it is likely to be sufficient, builders will often try for a six-month liability period whereas twelve months is industry standard.
6. Prime Cost and Provisional Sum Items
Prime cost items are fixtures and fittings that may be listed in the contract but not specifically identified and costed – usually because the exact type was not decided on at the time of signing – so the price is only an estimate. Ideally, you should avoid prime cost items as much as possible by deciding on as much as possible as early as you can. Provisional sum items are those that are listed in the contract for possible additional work where a builder is only able to make an estimate of the cost at the time. Items such as these should be avoided where possible as it can increase your overall costs.
Sometimes, however both prime cost and provisional sum items are unavoidable, and in these instances, we recommend homeowners negotiate a certain ‘capped amount’ with the builder, to ensure builder accountability in product estimation and selection.
7. Site Investigations
Before construction begins, it is important that your builder undertakes appropriate site investigations to determine the soil type, rocks that may need to be removed, and other things that could lead to unexpected price variations later. Your contract should include warranties relating to any necessary site investigations, and it is very important that all these latent condition issues are covered off before hand, to avoid contract price blow out.
8. Date for Practical Completion
The date for practical completion is the date that the construction is scheduled to be completed, barring any unexpected delays. This date should not be left blank on your contract, and it should be a realistic estimation of when the project is required to be completed.
9. Liquidated Damages
Something to consider when entering a contract is whether you want to include a liquidated damages clause. Liquidated damages are a set amount per day that the builder will pay you for every day past the date for practical completion that the work is not finished.
We always recommend that a liquidated damages amount be specified in the contract, because it will motivate the builder to complete the project on time. If there are no liquidated damages amount in the contract, the main remedies available to homeowners for late delivery is a breach of contract claim, and most builders know this is a lengthy and expensive process, so homeowners are unlikely to go down this route.
10. The Builder Themselves
While it might seem obvious, it is important to ensure that your builder has the appropriate licences for the work they are contracted to do. You should also check whether their work is of a quality you are expecting and whether they have received formal orders from QBCC to rectify defective work. If there are any of these orders, you may want to steer clear of the relevant builder and engage a different builder instead. Always ask for references as well, and make sure you contact the references or do standard google review searches, to ensure previous good experiences with that specific builder.
To ensure you fully understand your contract and that there aren’t any hidden surprises, the team at Enterprise Legal can help.
Make sure you contact us before you enter the relevant construction contract, and we will gladly assist in the review and negotiation of same:
