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If you are about to enter into, or have already entered into, a building contract in relation to a residential building, there are some critical things to look out for and be aware of.

If you proceed in ignorance of these things, you risk being 'bitten' later on.

Assuming that the contract is over the threshold amount of $5,000 in Victoria (check your state's local requirements relating to same) and that it is in writing, then first of all ensure all of the  inclusions and choices and fittings are agreed on and included in the contract. It is not good enough if such items are included later. The contract should also include details as to who is to be responsible for supply of items such as ovens, tapware and tiles, for example.

The relevant legislation has certain requirements for such contracts, but it is important to watch out for certain things and bear them in mind until the project is completed.

Delays are always possible and the commencement and completion dates (and how the commencement date is calculated) should always be agreed upon and noted. Note the number of days allowed for delays, which should be reasonable.

Check that the builder's registration details are current and that there are no restrictions or limitations which can become relevant. For example, there have been cases where a builder has had limits on their licenses stating that they couldn't construct a building over one storey in height, yet they enter into contracts to construct taller residential dwellings. Entering into a contract with such a builder is clearly a mistake. Of course, check more generally as to whether the builder is the right person for this particular job.

It should be clearly agreed and understood who is responsible for obtaining and paying for planning and building permits.

Special conditions, which generally prevail over general conditions, at least where the relevant clauses are inconsistent, should be checked as in these cases, the devil can be in the details.

It is critical for both the builder and the owner that domestic building warranty insurance is in place and referred to accurately in the contract.

The methodology of progress payments and how, when and how much can be validly claimed at any particular time is absolutely crucial to be set out correctly. The defects liability period (or maintenance periods) should be checked and understood. Perhaps the most common periods of time applicable are three- or six-month periods.

Variations are critical to deal with correctly. Many builders and/or owners forget or or just do not know that  generally the proper process is to have an initial discussion as to something 'extra' to the contract or to the project where that initial discussion then morphs into a verbal agreement. Then that verbal agreement becomes a quotation where the specific details of the change are documented. The quotation then becomes an invoice which is signed and which is carefully read for accuracy (and of course paid) and the extra works and or products and or services are delivered or provided. This is the ideal, anyway. Any new completion as a result thereof should be documented too.

Prime cost items are selections of fixtures and fittings that are listed items in the contract but which are not specifically identified and costed. This is typically because the owner and the builder could not determine or agree on the make, model or exact price of the item at the time of the signing of the contract – the price could only be estimated, and which could be less than the final cost.

Where possible, you should avoid prime cost items. Try to include the specific details of selections (such as make, model, colour and style) in the contract, so that the building cost is final. Much angst can thereby be avoided later.

And then there are provisional sum items - items listed in the contract for possible additional work, such as excavation, where the builder cannot give an exact price of the work at the time of the signing of the contract, and can only make a reasonable estimate of the cost.

Where possible, owners are advised to not agree on provisional sum items as they can make the  final total cost higher.

Seek legal advice if you are asked to enter into, or are considering offering or entering a cost-plus contract (where the builder charges by the hour and you do not have a fixed price). Cost-plus contracts are only allowed for renovation projects worth over $1 million, and then only in very limited circumstances.

Documentation is king, and that applies for both owners and builders and it helps to make the project smoother but of course, assists potentially as well, both parties in the event of a dispute down the track.

In  cases where any or all of the above issues are causing concern of any kind, it is best to seek the advice of a professional advisor to help you navigate what can become a minefield.

Brandon Vigon

 
  • Very good all round advice Paul.

    The 2 things that worry me though, are:- 1. Only about half of the (implied) warranties of the builder are actually mentioned, and 2. Defect is not defined, which together with Item 1 serves to strip home owners of most of their rights in a dispute, as experienced negators exploit the grey areas left by the absence of these two vital components of fairness.

  • Thank you, Paul for your advice. I agree with Mark re the 'grey' areas and everything being open to 'interpretation'. One example is a 'defect' where it will be argued that the bricks are not seconds' bricks, the water leakage is minor, or the foundations have failed because of the owners' 'landscaping' after handover, etc.. Also under Australian Consumer Law, unfair contract terms are 'lawful' in contracts over $300,000. Hence the majority of building contracts, which have been written by and for the builder are inherently unfair to the owners because they are biased to favour the builder. As you say, there is little information for consumers – I think it is called information asymmetry – and most owners think they have some 'protection'. Also as the Victorian Ombudsman found in 2012 and the Victorian Auditor-General confirmed again in 2015, 'being 'registered' provides no consumer protection for owners entering into a building contract. 'Registration' does not mean that 'builders' have the skills or knowledge – or ethics for that matter – and in effect, this label offers no comfort whatsoever for owners.
    In reality, when a builder walks away leaving an incomplete and very defective building behind, commonly the owners find that the so-called 'warranties' are worthless. And as anyone who has been involved in a dispute will attest, rarely do the facts and documentary evidence matter. For example, the contract will stipulate that for 'Variations' the builder must obtain the owner's signed consent – except the builder can argue a case not to have done so. A 'rule' followed by the exception that enables the builder to ignore the 'rule'. Documentary evidence such as Notes from meetings and photos can also be twisted in the 'interpretation' to become whatever the builder's team of legal and building experts want to argue – called 'muddying the waters'. Sadly, often it is those with the right people to 'defend' what is clearly very bad building who manage to "get out of trouble" leaving the owners facing an enormous financial loss and much serious emotional, psychological and other detriment. The outcomes for many owners are devastating. Far too many never recover, their lives ruined forever and too many do not live through the disastrous experience, with anecdotal evidence highlighting the high incidence of heart attack, stroke, attempted suicide and suicide as a consequence of the long, protracted and damaging 'dispute' process.

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