What steps should you take before negotiating a contract to ensure things go smoothly and your project succeeds?

Here are a few basic tenets you should always keep in mind and steps you should take:

  • Do a company search on a prospective builder and a credit check to determine whether the builder is financially viable.
  • Try to get directors’ guarantees from the builder, particularly if the company is a ‘two dollar company.’
  • Gain insight into the builder’s track record. Don’t necessarily engage the cheapest builder – always remember the age-old adage ‘you get what you pay for.’ The final amount paid, as distinct from the price quoted, is the telling factor.
  • Always read the contract thoroughly. When in doubt, seek legal advice.
  • Fill out the contract legibly and in a well-informed manner. Don’t sign anything you do not understand.
  • It is a sound practice to engage a building consultant to ensure the specifications and drawings are compatible with the terms of the contract.
  • If the contract is for complicated or large scale work, you can use a solicitor to conduct pre-contract negations. The solicitor can also be asked to carry out company and credit searches and might engage a consultant to ensure that the contract price is realistic.
  • Beware any quote that seems unrealistically low; it could be a recipe for disaster. If the builder under-quotes, they might be intending to claim variations or may be unfamiliar with contract costing and budgeting. Be wary of special conditions. Check the contract thoroughly to ensure that there are no special annexures that ‘slip through the net.’
  • To get a fixed price contract, understand that if there are prime cost or provisional sums, these contractual variables will impact upon the contract price and a fixed price will be prove elusive.
  • Negotiate an amount for liquidated damages that is reasonable – a genuine estimate of the loss that will be sustained if the builder delays the project. A local weekly rental value for the property is always a good ballpark figure for liquidated damages.
  • Avoid ‘home grown contracts’ (documents that are prepared by the builder companies). This type of contract is generally drafted by lawyers to favour the builder.
  • If the owner comprises a husband and wife, or a de facto couple, they are strongly advised to ensure that only one person is responsible for the owner’s contractual administrative responsibilities. It is equally critical to ensure that only one person discusses anything of contractual import with the builder. This avoids instances where builders are given one set of instructions by one spouse and a different set of instructions by another. If more than one person is involved, the builder might be confused, site morale can be affected, and a climate for litigation encouraged.
  • Ensure adequate finance has been secured before the contract is signed. It is important to allow for a buffer margin of say 10 to 15 per cent over and above the contract sum to cater for any unforeseen variations. Rarely does a house get built without variations being requested, many of them quite legitimate.
  • With regards to variations the Home Building Act NSW and the Domestic Building Contracts Act Vic require variations to be in writing, co-signed, scoped with adjustments to be made on time and price impacts. Ensure this occurs, further never be duped on variation requests. If it's covered on the plans and specs it can't be varied. If the variation is generated at the behest of the owner that's another story BUT still GET IT WRITTEN UP, co-signed etc.

  • Quite a useful guide. Other matters that are worth checking are whether the Builder is registered under State legislation where required and that the Builder has adequate insurance. An online search of judgements in various Courts and Tribunals can also be helpful in throwing up a Builder's track record in disputation. Also understanding and agreeing who is responsible for obtaining and paying for any certificates or permits prior to commencement of construction can avoid difficulties later on.

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