I know we all shy away from change in the residential building industry, but what if such a change can greatly benefit both builders and home owners?
What if something can be tweaked to make builders shift their priorities and make supervision numero uno?
If they do make this their number one priority, defects will virtually cease to be built into nearly every new home as has happened for the last 20 years, sometimes with disastrous results. Obviously this care-based (experienced, supervisory) role is also needed at soil classification time.
Under the present regulatory controls, there is a huge cost to the general public and ultimately the economy, when we do not penalize builders who build really poor quality houses, particularly those who are repeat offenders.
For two decades now, the authorities should have ensured that severe penalties were handed out, but because of agendas aimed at protecting enterprise, they have not penalized the builders who supervise poorly - those who accept the poor workmanship being carried out by their tradesmen to the enormous detriment of home owners and themselves.
This problem is exacerbated by growing numbers of home owners selling-on after VCAT settlements, their decrepit homes dolled up for a quick sale without many (or any) of the serious or expensive-to-repair defects being rectified at all. This is because they are (on average) already out of pocket something to the tune of $50,000 (or even more) when settlement is reached, having fought to have their builders rectify their defect-riddled homes.
They are also out of pocket a further $50,000 or more when they buy/sell. And because of the commonplace gag orders which accompany VCAT mediation and compulsory conference settlements, I understand the vacating new home owners are actually not permitted to divulge anything relating to the settlement with their builder.
It may also be difficult to claim newly discovered defects because of complex precedents, particularly as the house was sold ‘as was’ to the new home owner. In these cases, it was "their bad luck" that they didn’t obtain a building consultant report on the defects in the house prior to purchasing it.
But even hiring a consultant can be fraught with peril because most building consultants have too many disclaimers which preclude them from looking at more than 50 per cent of the house, and most don’t even have half a definition of defect.
Based on 500 new house inspections I have conducted on houses built since 1996, I can confidently say that in Victoria at least, there could be something like five cent of the total houses built in that time period which you would call lemons. Many of the remainder are defect-riddled band-aided homes which will regularly require considerable expenditure to maintain because proper rectifications were never carried out, courtesy of the builders who only agreed to ‘fix’ those defects that they could do cheaply.
So the likelihood of buying a relatively maintenance-free home (as you could in the 1970s and 1980s) is no longer the case because of the extremely poor supervision by the builders.
Poor workmanship can easily be avoided by adequate supervision, and a lack of adequate supervision is a failure in the duty of the builder to perform perhaps the most important duty - so it is negligence.
When builders tell their tradesmen what they are going to get paid, short-cutting often occurs as a pay-back because the tradesmen know that as long as they keep it neat and finished on time, they will almost certainly get away with it. They know their supervisor is too busy, and is likely inexperienced. So if the owners don’t realise either, why waste the time doing a thorough job for a mere pittance?
After 20 years of this scenario, short-cutting becomes the norm and poor workmanship is considered acceptable by an industry which seems not to care at all.
So let’s delve into what negligence is all about in order to discover why the writers of the Building Act 1993 and the Domestic Building Contracts Act 1995 thought to absolve builders of the need for professional indemnity insurance and permitted a lesser form of insurance - Building Warranty Insurance (BWI). BWI actually gave consumers some sort of protection until the "last resort" changes in 2002. Since then it has proved to be absolutely useless to most new home owners, and subsequent Victorian Governments have not switched back to the previous scheme.
Basically negligence is a failure of a person to carry out his/her duties. For a builder in the residential building industry those duties include:
- ordering suitable good quality new materials and protecting them from damage
- ensuring work is workmanlike and complies with permit documents
- scheduling the works so as to be completed by an agreed date
- supervising the work to ensure that defects are not incorporated and that workmanship is of a good quality
- ensuring the site is safe for the workers and that insurances are in place
Builders invariably have adequate cover when it comes to safety issues courtesy of their all risks insurance. But as regards negligence issues, there seems to be virtually nothing.
The possibility of negligence is why registered building practitioners have professional indemnity insurance (PI) - to cover them (and their clients) for negligence as regards the expertise they have been hired to provide.
But builders have domestic building insurance (DBI, formerly known as BWI), which hasn't worked in 14 years.
When it comes to the warranties listed in the building contract, they seem to be able, in the vast majority of cases, to wriggle free of their obligation to comply with those promised warranties, courtesy of the existing virtually worthless DBI.
When the government-run Housing Guarantee Fund Limited (HGFL) was insurer, the insurer had the power to make the offending builder toe the line. When repeat offenders came to light, I believe they were refused insurance for a period. But that was a long time ago, and the HGFL is gone.
Since July 2002, DBI has greatly lessened the risk for insurers by dint of their not being required to be involved in disputes until the home owners have pursued every avenue possible and the builder had either died, fled the country or gone bankrupt.
But the other side of the coin is that repeat-offender builders are now not known to the current insurer, courtesy of common law permitted gag orders used in VCAT compulsory conference/mediation forums forcing home owners to keep quiet about their stories if they wish to reach settlement.
Insidious gag orders were put there to protect business, and there will be great resistance to changing this.
So as regards the fairly useless current warranty insurance (DBI), let’s just keep the useful bits - the walk-away builder and bankrupt-during-construction builder options, but at vastly reduced rates.
Let's also require that builders obtain PI as is required for other registered building practitioners.
With PI for builders, there will be (at long last) heavy insurer scrutiny as to their credentials and their financial situation. Like any insurance, one failure and it’s up a price level. Three failures, and bye-bye insurance.
This should greatly improve the systems governing registration of builders - another improvement we have been desperately in need of for decades.
So why won’t the government institute this fair reform or revert to the system that prevailed in 1996, where the insurer acted as policeman (first resort)? There has to be something we are not being told, such as hidden pressures.
The industry is assured of continued growth because of successive federal governments insisting on maintaining sufficient immigration to ensure that the GDP is around four per cent as thought necessary by the great economist Maynard Keynes. So there is really no need for power broker fear tactics behind the scenes.
In 2013, the Victorian Ombudsman stated that builder warranty insurers paid out less than one per cent of the total premiums paid.
So to the Victorian government: please change DBI back to what it was in 1996 or institute PI reforms so new dwelling owners are no longer hung out to dry.
And at the same time, why not do what you ‘forgot’ to do in the recent reform and fully define defect and specification? It's time to be fair to consumers!